Intel's Strong Q3 Earnings Fuel Turnaround Hopes: Time to Buy?

Intel Corporation INTC has faced challenges to regain its footing in the semiconductor industry for a long time. However, with a return to profitability in the latest quarter and Intel’s partnership with the industry’s leading players to boost its business, the key question is whether these developments will lead to a lasting turnaround, and whether it is now the right time to invest in the stock. Let’s find out.  

Intel’s Q3 Earnings are Out – The Company Reports a Profit 

Intel announced third-quarter revenues of $13.7 billion, up 3% year over year, according to the company’s press release. This reflects a notable boost in demand for Intel’s Core x86 processors for personal computers (PCs). 

Intel’s products group division brought in $12.7 billion in revenue for the third quarter, a 3% increase from the same period last year. Within this division, the Client Computing Group, which includes PCs and laptops, earned $8.5 billion, up 5% from the previous year. 

Intel’s net income totaled $4.1 billion, or 90 cents a share, for the three months ended in September, reversing a net loss of $16.6 billion, or $3.88 a share, in the year-ago quarter. CEO Lip-Bu Tan’s initiatives to cut headcounts and halt certain projects proved effective, improving Intel’s profit margins. 

NVIDIA Deal to Boost Intel’s Data Center and AI Growth 

In the third quarter, the Data Center and AI division, part of the products group, generated $4.1 billion in revenue, a 1% decrease year over year. However, Intel expects its recent deal with NVIDIA Corporation NVDA to jump-start growth in its data center central processors (CPU) business. 

Both Intel and NVIDIA are collaborating to develop next-generation data center and PC products for hyperscalers and the broader consumer market. The partnership will integrate Intel’s x86 ecosystem with NVIDIA’s artificial intelligence (AI) and accelerated computing platforms via NVIDIA NVLink, as noted in the press release. 

Intel’s Foundry Business to Benefit From Microsoft Tie-Up 

In the third quarter, Intel’s foundry business produced $4.2 billion in revenue, a 2% decline from the previous year. Looking ahead, Microsoft Corporation MSFT is expected to leverage Intel’s foundry to develop its own advanced AI chips, which could significantly expand this division. 

Microsoft may decide to use Intel’s 18A or 18A-P process for its next in-house AI chip. The first version of Microsoft’s Maia AI chip was built using Taiwan Semiconductor Manufacturing Company Limited’s TSM 5nm process. Nonetheless, Intel has already strengthened its partnership with Microsoft through Windows ML collaboration and Intel vPro integration with Microsoft Intune, as mentioned in the press release. 

Here's How to Trade Intel Stock Now 

Intel’s strong third-quarter performance and its partnerships with NVIDIA and Microsoft to strengthen its data center and foundry business provide compelling reasons for stakeholders to remain invested in the stock.  

Confidence is further bolstered by Softbank and the Trump administration’s $2 billion and $8.9 billion investment, respectively, in Intel, aimed at strengthening the company’s efforts to develop a resilient semiconductor supply chain in the United States. 

However, despite the recent upbeat financial performance, Intel’s lofty valuation remains difficult to justify, which could be a potential headwind for the stock in the long run. Based on the price-to-earnings (P/E) ratio, Intel trades at 327.75 times forward earnings compared with the Semiconductor - General industry’s forward earnings multiple of 45.70.

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Therefore, new investors should wait for clear signs of a genuine turnaround before placing bets on INTC stock. Intel currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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