Intel’s $25 billion rally sends valuation to dotcom era levels

Intel Corp shares have rallied 28% this month, adding about US$25 billion (NZ$42.4b) in market value. Photo / David Paul Morris, Bloomberg

After months of turbulence, Intel Corp bulls are finally being rewarded for their patience. But the stock’s sudden rebound comes with a worrying side-effect: a valuation so high that its most recent precedent is from the dotcom era more than two decades ago.

Shares of the struggling chipmaker have rallied 28% this month, adding about US$25 billion (NZ$42.4b) in market value, on reports that the US government is in talks for a potential equity stake, as well as plans for a US$2b investment from Japan’s SoftBank Group Corp. The jump has Intel trading at 53 times profits projected over the next 12 months, the highest since early 2002, according to data compiled by Bloomberg.

“The stock looks incredibly expensive here,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services. “That kind of multiple is a bet that the government will push Intel so hard on customers that it becomes a winner.”

The surge in Intel this month followed a slump after a disappointing earnings report on July 24 and criticism of Tan earlier by President Donald Trump, who called for the CEO to step down, citing conflicts of interest. After meeting with Tan on August 11, Trump changed his tune, saying Tan’s “success and rise is an amazing story”.

Since then, reports have circulated that the Trump administration is in discussions to take a stake of about 10% in the company. Commerce Secretary Howard Lutnick said in a CNBC interview this week that the talks are aimed at converting US grants already made to Intel under the Chips and Science Act into non-voting equity.

Of course, the US’ plans regarding Intel haven’t been finalised and could still change. Intel didn’t respond to a request for comment.

For Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, the potential government involvement could benefit Intel in the short term but may pose a risk in the long term.

“This strikes me as an easy road to get onto, but a hard one to get out of,” Nolte said. “At the end of the day, this raises so many more questions than it answers.”

Meanwhile, Intel’s premium valuation is largely a reflection of just how much its profitability has collapsed in recent years.

Intel is projected to generate more than US$1b in adjusted profit over the next four quarters, after losing about US$1.3b in the previous four, according to data compiled by Bloomberg. From 2018 to 2021 the company generated more than US$20b in annual profits on average.

Still, there is optimism that chief executive officer Lip-Bu Tan will be able to turn things around. Much of his focus has been on cost-cutting, which has improved Intel’s outlook to return to profitability but raised concerns the chipmaker may be bowing out of the race for technological leadership. Part of his effort has also been centred on a costly build-out of its foundry operations undertaken by his predecessor, Pat Gelsinger.

“Clearly it’s going to take a number of years for it to really start operating on a smooth basis,” said Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity fund. “We’ve got trust in him, but we think he’s got a long slog ahead.”