Why Intel Stock Is Undervalued and Well-Positioned to Thrive in the AI Era

Stocks to buy

Intel (NASDAQ:INTC) remains poised to generate higher-than-expected revenue from its recently released Gaudi 3 AI chips. Moreover, the firm is benefiting from significant increases in notebook sales now, while it should get a big lift from strong AI PC sales and its chip manufacturing business in the longer term. Since the valuation of Intel stock does not come close to reflecting these strong, positive catalysts, I continue to be bullish on the shares.

Gaudi 3 Should Move the Needle Positively for Intel

According to data released by Intel, Gaudi 3 can be trained 40% more quickly than Nvidia’s (NASDAQ:NVDA) H100 AI chips, while Gaudi 3’s inferencing is twice as fast. And Gaudi 3’s inferencing is also 1.5 times faster than Nvidia’s more advanced H200 AI chip, Intel reported. Finally, in terms of “inference throughput,” Gaudi 3’s offers 2.3 times the performance per dollar of Nvidia’s H100 chip.

And, according to The Next Platform, a tech news website, a complete AI system that uses Gaudi 3 chips costs $300,000. That’s significantly less expensive than the $375,000 cost of an equivalent system powered by H100 chips.

Given all of these points, I expect Intel’s revenue from the Gaudi 3 to explode higher over the next six months, exceeding the Street’s current expectations.

Higher Notebook Sales and the Advent of AI PCs

According to Citi, overall computer notebook sales jumped a higher-than-expected 15% last month. As a result, the bank believes that Intel’s chip revenue will exceed the average estimates for the current quarter. Intel obtains a huge 37% of its overall revenue from notebook chips.

Citi believes that there will not be huge demand for AI PCs for another year. That forecast is similar to a certain extent to estimates published by Statista in April. According to the latter website, AI PCs will account for 19% of all PCs shipped globally this year, while the proportion will increase to 37% in 2025. In 2026, the ratio will climb to 53%. Since Intel controls the majority of the PC chip market, it will be able to benefit a great deal from providing the powerful chips needed to power AI PCs.

Intel’s Chip Manufacturing Business Should Blossom

Taiwan’s Taiwan Semiconductor Manufacturing (NYSE:TSM) currently has a 68% share of the global chip manufacturing business, according to Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) artificial intelligence (AI) engine. But as Seeking Alpha columnist Hawkinvest poised out in a June 11 article, Taiwan Semi faces significant geopolitical risk. That’s because, in recent years, China has regularly threatened to invade Taiwan , since China views the island as part of its country. As a result, many chip makers that rely on Taiwan Semi to manufacture their semiconductors are likely looking for alternative suppliers in order to minimize their risk, Hawkinvest reported.

Because Intel is building its own large chip-manufacturing business, it can benefit from this situation. Indeed, the company has already announced that it has made a deal to build chips for Microsoft, and Nvidia has indicated that it’s interested in having Intel manufacture its chips. In fact, in May 2023, Nvidia CEO Jensen Huang said that he was pleased by prototype chips produced by Intel.

Valuation and the Bottom Line

Intel stock currently trades at a rather paltry enterprise value/EBITDA ratio of just 13.5 times.

That’s a very low valuation, considering that analysts, on average, expect its earnings per share to surge to $1.81 next year from $1.02 in 2024. And analysts are likely underestimating the strong boosts that the company will enjoy from its AI chips and its manufacturing business.

With Intel well-positioned to benefit tremendously over the longer term from the AI era, the shares are definitely a buy for all investors at this point.

On the date of publication, Larry Ramer held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.  

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.

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