Up 111%, Should You Buy Intel Stock Right Now?

Intel (NASDAQ: INTC) has turned into a leader from a laggard on the stock market in the past six months or so, jumping 111% as of this writing since hitting a 52-week low on April 8. The stock's gains during this period have outpaced the 96% spike in the PHLX Semiconductor Sector index.

It looks like the good times are here to stay for Intel. The company released its third-quarter results on Oct. 23, and investors liked what they saw. Let's look at the company's performance to see if it is worth buying this semiconductor stock in anticipation of more upside.

Image source: Intel

Better-than-expected results have bolstered investor confidence

Revenue in the third quarter increased 3% from the year-ago period to $13.7 billion, while its cost-cutting moves helped it post adjusted earnings of $0.23 per share, compared to a loss of $0.46 per share in the year-ago period.

Analysts would have settled for $0.02 per share in earnings on revenue of $13.2 billion. CEO Lip-Bu Tan's comments seem to have bolstered investor confidence when he said that the demand for artificial intelligence (AI) processors is helping the company. Though Intel's revenue from its data center and AI segment was down by 1% year over year to $4.1 billion, the company said on the earnings call that supply constraints limited added upside.

Management says that its server central processing units (CPUs) are seeing healthy demand from the shift toward AI inference workloads. As a result, the company is expecting the total addressable market for server CPUs to expand. And its largest business -- the client computing group -- reported 5% growth from the year-ago period to $8.5 billion.

Both the client and the server CPU markets represent secular growth opportunities for Intel since they are benefiting from the adoption of AI in computers and data centers. But the problem so far is that it is losing ground to rival Advanced Micro Devices, whose share of the client CPU market increased by 2.8 percentage points in the second quarter, as it also gained 3.2 percentage points in server CPUs, according to Mercury Research.

But then, Nvidia's recent investment in Intel could help the latter turn its fortunes around. It announced a $5 billion investment in Intel last month, saying that it will collaborate with the latter to "jointly develop multiple generations of custom data center and PC products that accelerate applications and workloads across hyperscale, enterprise and consumer markets."

Intel has also received investments from SoftBank and the U.S. government of late, which should give it the financial cushion in the AI chip market. And the company reports that the demand for its AI CPUs is exceeding supply -- another positive that could help it in the future.

But Intel isn't out of the woods completely yet, even though it is showing that it has the potential to execute a turnaround. The company is on track to reduce its workforce by more than 20% in 2025. Chief Financial Officer Dave Zinsner told Reuters that the production yields of its advanced 18A chip node are still below industry standards.

That means the company is getting a lower proportion of usable chips from a single wafer. It still needs time until 2027 to lower the number of defects and bring the yields to acceptable levels. The 18A process, which will allow Intel to manufacture chips using a 1.8-nanometer (nm) process node, will be crucial for the company to claw back its leadership in the chip market.

The company's rivals have been using Taiwan Semiconductor Manufacturing's advanced process 3nm and 4nm/5nm process nodes to deliver more powerful and power-efficient chips. The Taiwan foundry is expected to start shipping its 2nm chips next year, so it is important for Intel to get its 18A process up to speed quickly.

Management's outlook is another reason to worry. The company expects $13.3 billion in revenue in the current quarter and an adjusted profit of $0.08 per share. For comparison, it reported a profit of $0.13 per share in the same period last year on revenue of $14.3 billion. So its top and bottom lines are expected to contract, and that doesn't bode well for this semiconductor stock considering its valuation.

The valuation is a red flag

Intel's huge rally in the past six months was built more on hope than on performance. That's clear from the company's latest results. Its revenue growth was anemic, and its bottom-line gains were driven by its cost-cutting moves. The outlook clearly indicates that there is still a lot of work to do before it can return to growth.

That's why buying the stock while it is trading at an expensive 88 times earnings looks like a risky move, especially considering that its turnaround hasn't begun yet. The forward earnings multiple of 56 isn't cheap, either. In fact, investors can buy semiconductor companies growing at a faster pace than Intel at much cheaper valuations, and that looks like the smarter thing to do considering the points discussed above.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.