Intel’s Stock Outlook: AI Growth vs. Regulatory Risks

The enthusiasm surrounding artificial intelligence (AI) ever since the debut of ChatGPT in November 2022 is still in full swing, rapidly engulfing various industries. This relentless wave of innovation is reshaping the technological landscape, with tech giants racing to develop cutting-edge generative AI models to meet escalating demands.

Among the beneficiaries of this AI boom, the semiconductor industry finds itself in an enviable spot, poised to capitalize on the surging need for AI chips capable of powering generative AI models. With the AI revolution continuing to gain momentum, chip giant Intel Corporation (INTC) is strategically positioning itself to harness this wave of transformation.

Despite most of last year’s AI frenzy being indebted to NVIDIA Corporation (NVDA), thanks to its GPUs powering prominent AI models, such as ChatGPT, INTC is determined not to lag behind either.

Last year, INTC introduced Gaudi3, an AI chip tailored for generative AI software. Expected to debut this year, Gaudi3 will join the competition against NVDA’s H100, a popular option for companies constructing extensive chip farms to drive AI applications, and Advanced Micro Devices, Inc.’s (AMD) upcoming MI300X, slated to begin shipping to customers in 2024.

In addition to Gaudi3, INTC unveiled Core Ultra chips tailored for Windows laptops and PCs alongside new fifth-generation Xeon server chips. Notably, both chip variants feature a dedicated AI component known as an NPU, enhancing the capability to execute AI programs more swiftly.

This strategic move also serves as a signal to investors regarding the potential for increased demand for their chips in the AI-driven landscape.

Furthermore, in a recent move, INTC unveiled a range of new platforms, solutions, and services encompassing network and edge AI, Intel® Core™ Ultra processors, the AI PC, and beyond. This initiative aims to enhance total cost of ownership (TCO) and operational efficiency while ushering in fresh innovations and services.

In this modern era, where staying competitive necessitates embracing technological advancements, INTC is rolling out products and solutions to enable its customers, partners, and vast ecosystems to seize the emerging opportunities presented by AI and integrated automation.

With the demand for chips that fuel generative AI models soaring all across the globe, industry giants like INTC, AMD, and NVDA are engaging in fierce competition to deliver cutting-edge AI chips, surpassing escalating performance expectations.

However, the ambitious expansion plans of these major chip giants met with hurdles last year in October when the Biden administration implemented measures to restrict the types of semiconductors that American companies can sell to China.

U.S. Commerce Secretary Gina Raimondo emphasized the administration's commitment to safeguarding national security by limiting access to critical technologies, rigorously enforcing regulations, and minimizing unintended impacts on trade flows.

Nevertheless, INTC bypassed export restrictions by supplying chips worth hundreds of millions of dollars to the heavily sanctioned Chinese tech and telecom companies in Huawei. This move, which allowed INTC to furnish Huawei with chips for laptop use, has sparked criticism from its competitor, AMD.

INTC’s chip sales to Huawei notably surged between 2020 and 2023, while AMD's sales witnessed a decline.

This discrepancy arose from the United States Department of Commerce granting special permissions to select American suppliers of Huawei, including INTC, to sell specific items to the company in 2020. However, AMD's efforts to secure a license to sell similar chips under President Joe Biden's administration went unanswered.

On the other hand, despite bypassing restrictions to sell chips to Huawei, INTC experienced a decline in overall sales in China in 2023 due to the export ban. China holds significant importance for INTC, with revenue from billings to the country constituting 27% of its total sales.

Last year, INTC generated a total of $14.85 billion of its revenue in China, marking a year-over-year decline of more than 13%.

Meanwhile, both AMD and NVDA witnessed a notable decline in sales to China, surpassing that of INTC as a result of the stringent export control regulations imposed by the U.S. government.

Moreover, there is a growing likelihood that INTC could encounter comparable restrictions to those faced by AMD and NVDA. This stems from mounting pressure on President Biden to revoke the license granted by the Trump administration, permitting INTC to continue chip supplies to Huawei.

Bottom Line

With shares roughly up more than 50% over the past year, INTC has successfully capitalized on the AI tailwinds. Despite challenges, including export restrictions and intensifying competition, INTC remains committed to innovation and expansion in the AI chip market.

According to Gartner, Intel holds the top position as the largest semiconductor maker by revenue in 2023 despite having a market cap that ranks below NVDA and AMD. The company’s fourth-quarter results witnessed a 9.7% year-over-year rise in its topline figure, reaching $15.41 billion. Its net income stood at $2.67 billion versus a net loss of $664 million in the prior year’s quarter.

Pat Gelsinger, CEO of INTC, remarked that the company achieved robust fourth-quarter results, surpassing expectations for the fourth consecutive quarter, with revenue reaching the higher end of their guidance.

Furthermore, he emphasized INTC’s commitment to advancing its mission of making AI technology accessible across various sectors while generating long-term value for stakeholders.

The stock also appears quite reasonably priced compared to its industry peers. For instance, INTC’s non-GAAP price-to-earnings (P/E) ratio of 31.21x is lower than NVDA’s 35.62x and AMD’s 52.36x, respectively.

However, despite its commendable efforts and dedication to capture the global AI chip market, there is an increasing possibility that INTC may encounter similar restrictions as those faced by AMD and NVDA.

This adds uncertainty to Intel’s prospects, particularly as its competitor NVDA plans to initiate mass production of a downgraded version of its AI chips specifically designed for China in the second quarter of 2024 to comply with U.S. export regulations.

In conclusion, while INTC has made significant strides in the AI chip sector and boasts solid fundamentals, the looming regulatory challenges pose a risk to its growth trajectory. Therefore, investors could carefully monitor the stock for now and wait for a better entry point.

Forget NVDA, Buy This AI Stock Instead

Dell Technologies Inc. (DELL) is thriving amid the burgeoning artificial intelligence (AI) revolution, capitalizing on robust adoption. Following a stellar fiscal 2024 fourth-quarter earnings report, Dell’s stock hovers near record highs. Active participation in the AI landscape is propelling the company’s prospects, aligning with the prevailing industry momentum.

Last Friday, DELL's stock witnessed a staggering 30% surge. Investors lauded the company’s AI-driven advancements and heightened demand for its offerings, driving the year-to-date surge to 54%.

The Texas-based tech firm reported fourth-quarter adjusted earnings per share of $2.20, surpassing analysts’ expectations of $1.72. Additionally, Dell’s revenue amounted to $22.32 billion, exceeding the projected $22.17 billion. Strong data center server sales for generative AI applications offset sluggish PC sales during the period.

During the quarter that ended February 2, 2024, DELL experienced a 10.9% year-over-year decline in revenue to $22.32 billion. However, the company’s net income surged 91.1% from the prior year’s period to $1.16 billion. Despite a 5.8% year-over-year decrease, its Infrastructure Solutions Group (ISG) contributed $9.33 billion to revenue.

AI-optimized servers emerged as the primary revenue driver, generating $4.86 billion, while storage revenue saw a significant 9.9% sequential rise, contributing $4.48 billion. Servers and networking remained pivotal, underscoring DELL's strategic focus on AI-driven solutions and storage innovations.

Jeff Clarke, Vice Chairman and Chief Operating Officer of DELL, highlighted the company's robust AI-optimized server momentum, citing a nearly 40% sequential increase in orders and a doubling backlog, reaching $2.9 billion by the end of the fiscal year.

Clarke said, “We’ve just started to touch the AI opportunities ahead of us, and we believe Dell is uniquely positioned with our broad portfolio to help customers build GenAI solutions that meet performance, cost and security requirements.”

Turning to cash inflows and the balance sheet, DELL reported a fourth-quarter cash inflow from operations of $1.50 billion, primarily fueled by profitability. The company ended the quarter with $9 billion in cash and investments, and it reached its core leverage target of 1.5x, exiting the fiscal year 2024.

During the quarter, the company repurchased 11.2 million shares of stock and paid a quarterly dividend of $0.37 per share. Furthermore, DELL announced a 20% hike in its annual dividend, now standing at $1.78 per share. The dividend increase surpasses the company’s long-term financial framework and underscores its confidence in the business trajectory and capacity to generate robust cash flow.

Strategic Business Advancements

DELL has been expanding its portfolio to meet diverse customer needs across clouds, on-premises, and at the edge. Enhancements to the Dell Generative AI Solutions portfolio include support for Advanced Micro Devices, Inc.’s (AMD) Instinct™ MI300X accelerator in PowerEdge XE9680 servers and a new DELL Validated Design for Generative AI with AMD ROCm™ powered AI frameworks.

New enterprise data storage advancements have also been introduced, with planned validation with the NVIDIA Corporation’s (NVDA) DGX SuperPOD AI infrastructure, facilitating swift access to data for AI workloads using DELL PowerScale systems.

Moreover, the company has unveiled plans for the broadest portfolio of commercial AI laptops and mobile workstations, integrating built-in AI acceleration with neural processing unit (NPU) technology. Additionally, new XPS systems boast NPU integration, enhancing performance, productivity, and collaboration.

Furthermore, DELL has forged a strategic partnership with Nokia Corporation (NOK), becoming its preferred infrastructure partner for Nokia AirFrame customers. The collaboration entails transitioning to DELL PowerEdge servers with comprehensive DELL global services and support.

A Comparative Analysis of DELL and NVDA’s Performance

Following its robust fiscal 2024 fourth-quarter results reported last Thursday, DELL’s stock has surged significantly, showcasing its dominance in AI offerings. The momentum stems from DELL’s utilization of NVDA’s AI-powered GPUs for its servers, aligning with the chip giant's remarkable success.

DELL’s AI-optimized servers integrate graphics processing units (GPUs) from both NVDA and AMD. Clark noted that the heightened demand was across the H100, H800, H200, and MI300X, with the first three GPUs manufactured by NVDA and the last one by AMD.

This development is likely to please NVDA investors, given that the company also reported fourth fiscal quarter earnings surpassing Wall Street's expectations for both earnings and sales. However, its CEO, Jensen Huang, has acknowledged investor concerns regarding the sustainability of this growth and sales level throughout the year.

Furthermore, NVDA’s data center revenue suffered due to recent U.S. constraints on exporting advanced AI semiconductors to China. NVDA’s CFO, Colette Kress, highlighted that despite enhancements in the supply of AI GPUs, shortages are still anticipated, particularly for the upcoming next-generation chip, dubbed B100, slated for shipment later this year.

Additionally, NVDA’s smaller ventures didn’t exhibit the same remarkable growth. Its automotive segment experienced a 4% decline, generating $281 million in sales, while its OEM and other businesses, encompassing crypto chips, saw a mere 7% increase to $90 million.

Moreover, NVIDIA’s valuation is deemed excessively high, positioning DELL as a more favorable investment choice at present.

In terms of forward P/E, DELL is trading at 26.78x, 29.5% lower than NVDA’s 37.96x. DELL's forward EV/Sales of 1.12x is 94.1% lower compared to NVDA’s 18.91x. Additionally, DELL's forward EV/EBITDA of 9.48x contrasts with NVDA’s 29.38x.

Reflecting the heightened demand and growing interest in enterprise AI, DELL’s stock has surged nearly 37% over the past month, outpacing NVDA’s gain of 24%. Furthermore, DELL has skyrocketed more than 155% over the past nine months, while NVDA has gained approximately 119% during the same period.

DELL's Upbeat Fiscal 2025 Projections

DELL's confidence in its fiscal year 2025 outlook stems from three pivotal trends: the escalating momentum in AI, notable enhancements in traditional servers, and the imminent refresh of the aging PC installed base. Against this backdrop, DELL anticipates fiscal 2025 revenue between $91 billion and $95 billion, with a midpoint of $93 billion, reflecting 5% growth, surpassing its long-term value creation framework.

The company anticipates ISG to surge in the mid-teens, driven by AI, with a resurgence in traditional servers and storage. CSG business is forecasted to expand in the low single digits for the year. The amalgamation of ISG and CSG is expected to grow by 8% at the midpoint, counterbalanced by a decline in other sectors.

For the first quarter of fiscal 2025, DELL projects revenue between $21 billion and $22 billion, centered around $21.5 billion, marking a 3% increase. The company anticipates ISG and CSG combined to grow by 5% at the midpoint, with ISG climbing in the mid-to-high teens.

Yvonne McGill, DELL’s CFO, said, “We have strong conviction in the growth of our TAM over the long term, and we are committed to delivering against our long-term financial framework with average annual revenue growth of 3% to 4%, diluted EPS growth of at least 8% and a net income-to-adjusted free cash flow conversion of 100% or better over time.”

She has also emphasized the commitment to returning 80% or more of the adjusted free cash flow to shareholders over the long term.

Bottom Line

DELL, renowned for its PC business, has garnered considerable attention due to increased demand for its resilient servers designed for AI workloads. The fourth-quarter results showcased an enduring interest in DELL’s AI offerings, spotlighting the Dell PowerEdge XE9680 as the fastest-ramping solution in the company’s history.

After DELL’s strong earnings report, analysts have voiced optimism and confidence in the stock’s performance. Morgan Stanley analysts, led by Erik W. Woodring, upheld a Top Pick rating for DELL stock, raising the 12-month target price from $100 to $128.

Additionally, Goldman Sachs analyst Michael Ng has expressed a favorable outlook, suggesting that DELL’s stock is poised to trade higher, buoyed by the stronger-than-expected AI server backlog and improved margins in the Infrastructure Solutions Group (ISG). That bolsters the bank’s bullish stance on heightened earnings potential and sustained growth amidst robust AI demand.

Industry experts have also emphasized DELL’s position as a clear leader in the AI hardware and services market, citing the company’s ability to swiftly supply high-end server models with accelerators from various silicon providers. Dell’s competitive advantage positions it to capitalize on the early stages of the AI server opportunity, especially in the enterprise-focused market.

Expansion in AI servers will also drive growth in DELL’s storage business. With extensive training conducted using rich data sets, the company’s venture into enterprise territory presents a burgeoning storage opportunity. DELL has enhanced performance concerning latency-sensitive workloads, aligning with enterprise requirements as customers transition from training to inference.

In conclusion, DELL’s outstanding fourth-quarter performance and upbeat fiscal 2025 outlook, propelled by AI server momentum, have instilled investor confidence and received a commendation from analysts. Given NVDA’s slowing revenue growth, regulatory challenges, and alarming valuation, it could be wise to invest in fundamentally sound AI stock DELL instead.