Intel’s Risky Bet: Inflated Expectations Could Lead to Painful Corrections

INTC stock trades as if an AI and foundry-fueled comeback is just around the corner, but the timeline is long and uncertainty runs high

Intel (NASDAQ:INTC) has pulled back slightly since January, but at around $45.29 per share today, INTC stock remains at price levels well above its 52-week low ($25.97 per share).

It’s not surprising that the chip maker’s shares have held onto the lion’s share of these recent gains. The market remains somewhat bullish about Intel’s AI chip prospects.

Investors are also hopeful about the company’s efforts to become a major chip foundry (third party manufacturer of semiconductors for “fabless” chip companies).

Yet while in theory these two catalysts could drive a strong comeback for INTC, there’s just one problem. Based on the stock’s current valuation, a potential turnaround is priced-in as if it’s just about to happen.

If you currently or will soon have exposure to this stock, here’s why that’s a big problem.

INTC Stock: Why Mr. Market Still Leans Bullish

As seen from the continued performance of AI chip plays like Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), “AI mania” is still going strong. Yet while this factor isn’t having as strong of an impact on Intel as it is on its two key competitors, it’s certainly providing a boost.

That’s not all. Taking a look at recent company-specific headlines, there’s much out there helping to drive optimism about INTC stock. For instance, a recent headline that, while related to the AI chips trend, pertains more strongly to the foundry catalyst.

I’m talking about Microsoft’s (NASDAQ:MSFT) plans to use Intel’s foundry services to produce $15 billion worth of custom chips for AI and other advanced applications.

More recently, Intel’s CFO David Zinsner provided an upbeat update on the company’s foundry efforts at an investment banking conference.

As of this writing, reports are circulating that the U.S. Federal Government plans to provide Intel with $3.5 billion in funding for the development of advanced semiconductors for military and intelligence applications.

Still, while there are good reasons to be upbeat on Intel’s prospects, as I mentioned above, the market has priced them in too far, too soon.

Priced for Perfection?

Previously, cutting-edge chip stocks like AMD and NVDA were “priced for perfection,” while INTC stock languished in value stock territory.

Yet while AMD may currently have “priced for perfection” status as well (as it trades for 57.8 times forward earnings), NVDA trades at a reasonable forward earnings multiple, while Intel commands a stretched valuation.

How so? Yes, technically, Nvidia (at 36 times forward earnings) is pricier than Intel (at 32.6 times forward earnings). Not only that, analyst consensus for the next fiscal year calls for INTC to report a much higher level of earnings growth (71.3%) compared to NVDA (19.25%).

Still, when comparing the likelihood of actual results meeting expectations, I’m willing to wager that Nvidia will win out. Namely, because Nvidia is the dominant name in AI chips. Only time will tell whether Intel’s revamped AI chip strategy will result in the company gaining significant ground.

With this, Nvidia for now remains better-positioned to capitalize on rising AI chip demand. Hence, it’s better poised than Intel to continue meeting/beating forecasts. It’s unclear whether Intel’s foundry business will take off in time to drive the aforementioned expected earnings rebound.

The Verdict: Wait for a Better Entry Point

As I have noted previously, alongside positive news about the foundry catalyst, there has been some negative news/developments that call into question when, or to what extent, this catalyst will have on future results.

With the stock pricing-in a recovery as if it’s a lock, if subsequent results, news, or updates to guidance run contrary to this view, it may have a material impact on INTC’s price performance. That’s exactly what happened after Intel’s latest earnings release in late January, when lackluster guidance caused shares to fall by double-digits.

Don’t get me wrong, the situation with Intel has improved greatly, and stands to improve further. However, instead of buying into INTC stock at a premium price, sell/avoid for now. Wait for the next temporary round of fear, uncertainty, and doubt before diving back in.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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