Intel FY25: More road to go

Key Points

• Given these dynamics, we maintain a Neutral stance. A fair valuation of 24x FY27 earnings yields a target price of USD 25, implying 19.0% upside.
• While Intel's first-quarter results surpassed expectations, the company's guidance for the second quarter fell significantly short of both revenue and EPS forecasts, citing macro uncertainties and operational restructuring.
• With near-term financial performance clouded by geopolitical and economic uncertainties, investor attention is expected to shift towards executing strategic initiatives under the new CEO Lip-Bu Tan.
• A key consideration for investors is gaining confidence in the future trajectory of Intel's gross margin.

1Q25 earnings top estimates; Forecasts disappoint  

While Intel's first-quarter results surpassed expectations, partly driven by stronger-than-anticipated PC demand (likely boosted by customers accelerating purchases ahead of potential tariffs), the company's guidance for the second quarter fell significantly short of both revenue and EPS forecasts, citing macro uncertainties and operational restructuring. 

Table 2: Table X: Intel’s 2Q25 Guidance 

With near-term financial performance clouded by geopolitical and economic uncertainties, investor attention is expected to shift towards executing strategic initiatives under the new CEO Lip-Bu Tan. 

Acknowledging Tan’s deep experience in the industry, it is extremely challenging to navigate a complex turnaround at Intel. According to Tan, key focus areas include efforts to streamline operations, reduce costs, and reposition Intel for enhanced long-term competitiveness, particularly in the foundry and AI markets. 

Organisational restructuring with a cut in operating expenditure 

During the 1Q25 earnings announcement, Intel announced plans to flatten its organisational structure, streamline operations, and rebuild its engineering teams. These steps are intended to reduce decision-making friction and improve efficiency. As a result of these initiatives, Intel has lowered its operating expense (OPEX) targets, now guiding for approximately $17 billion in 2025, representing a $500 million reduction from prior guidance, and targeting $16 billion in 2026 while announcing a layoff programme.

Foundry Strategy: Potential and Pitfalls

Beyond the OPEX reductions, Intel's gross margin recovery is largely anticipated to be a 2026 and beyond story. 

The most significant drivers for this recovery are expected to be an increasing mix of products utilising EUV lithography and the reintroduction of tile-based designs. Specifically, the 18A-based Panther Lake client CPU, expected by the end of 2025, will incorporate tiles. Broader product lines (SKUs) are anticipated to adopt this architecture in 2026 and subsequent years. This timeline raises concerns that margin recovery could be delayed..

Intel's historical performance has been significantly impacted by its high fixed-cost model as an Integrated Device Manufacturer (IDM), which has been a primary contributor to the decline in its gross margin. Lower revenue, pricing pressure stemming from market share losses, and substantial upfront costs associated with developing advanced manufacturing nodes have collectively weighed on the company's overall profitability. As shown in the figure below, Intel’s foundry is largely under-utilised despite the robust AI development backdrop.

Figure 2: Intel’s Foundry location and pipeline 

Can the gross margin improve in future? Bottoming, but more clarification is needed to boost

A key consideration for investors is gaining confidence in the future trajectory of Intel's gross margin. 

A significant driver for potential improvement in this area will be the company's transition to its 18A manufacturing node, anticipated in late 2025 or early 2026. This transition is notably important as it facilitates the reinternalization of compute tile manufacturing for the Panther Lake client CPUs. This represents a shift from the preceding Lunar Lake and Arrow Lake generations, which relied on external manufacturing partners like TSMC for these critical components, a reliance that previously contributed to lower gross margins.

Looking at the near term, we currently see 2024 as the likely bottom for Intel's gross margin, potentially hovering in the 30-40% range. However, several headwinds are expected to persist throughout this year, which will constrain near-term upside. These factors include an unfavourable product mix from Lunar Lake, continued elevated levels of external sourcing, and limited financial contributions from the nascent foundry business during this period.

Figure 3: Intel's Gross margin

CPU Roadmap Execution: Panther Lake and Beyond 

Addressing these challenges, Intel has consistently emphasised the critical role of its advanced 18A process technology within its long-term IDM 2.0 strategy. This strategy aims to restore leadership in semiconductor process technology and significantly enhance cost competitiveness over the long term, supported by an ambitious goal of manufacturing approximately 70% of its products internally using advanced nodes like 18A. The successful development and deployment of the 18A process are paramount to executing this strategy.

The initial stock-keeping unit (SKU) of Intel's next-generation Panther Lake CPU is projected for market availability by the end of 2025, with a broader range of SKUs expected to follow in the first half of 2026. Panther Lake represents a strategically important product launch, as it is anticipated to be among the first major product lines to fully leverage the advancements of the 18A process technology. 

Consequently, it is anticipated to play a key role in Intel's competitive positioning across both the PC and potentially the server markets. The success of the Panther Lake launch and its market reception will serve as a critical early test of Intel's ability to deliver competitive, high-performance products utilising its advanced internal manufacturing capabilities.

Figure 4: Intel Foundry Process Roadmap

Foundry business still vague, wait-and-see approach is prudent 

We believe that building investor confidence in Intel's overall Foundry strategy, which is fundamentally underpinned by the successful ramp of Intel 18A and the delivery of competitive products built on this node, is essential for a positive shift in the market narrative surrounding the company. 

Recent financial reporting provides insight into the nascent stage of the external-facing aspect of this foundry business. For example, under its new segment reporting structure, Intel reported total Foundry Services revenue of $17.5 billion in 2023. However, the vast majority of this revenue was derived from internal manufacturing; external customer revenue within this segment was $953 million in 2023 and declined to $385 million in the first quarter of 2024.

To add, Intel 18A is yielding at 20-30% yield (comparing TSMC’s n2 60% yield), thus Intel remains far from mass production readiness, according to renowned leaker Ming-Chi Kuo. Having said that, with the limitation in yield, it makes mass production almost impossible at this stage and the targeted deployment might be postponed further. 

All in all, we believe Intel’s Foundry business will continue to be a revenue detractor in the near term, resulting from low yield alongside low external customer rate. Despite the ongoing efforts are encouraging, we think it might be more prudent to take a wait-and-see approach until more certainty about the project is announced. 

Government incentives not enough to cushion 

Complementing its internal strategy, Intel is also a key recipient of government support aimed at bolstering domestic semiconductor manufacturing. Through the U.S. CHIPS and Science Act, the U.S. Department of Commerce has awarded Intel up to $7.86 billion in direct funding.

The CHIPS Act represents a large and complex program, encompassing various incentives and stringent requirements for recipients. Successfully navigating this complexity and fulfilling the specific conditions for funding disbursement presents inherent challenges. In the first quarter of 2025, Intel recognized $778 million in CHIPS Act grants. This amount was allocated between $690 million in capital-related incentives, which resulted in a reduction to gross property, plant, and equipment (PP&E) on the balance sheet, and $88 million in operating-related incentives. 

Underlying this cautious governmental stance are concerns regarding Intel's ability to fully execute on its ambitious commitments for building new manufacturing facilities and achieving specified production targets within the projected timelines. These execution-related concerns appear to contribute to the government's apparent hesitation in releasing further substantial funding tranches until more tangible, verifiable progress on these large-scale projects is clearly demonstrated.

A competitive landscape 

AMD has significantly increased its share in the server CPU market, though Intel still holds the majority. In the AI accelerator market, NVIDIA holds a dominant share, but Intel and AMD are actively competing for design wins, particularly as companies seek alternatives and diversify their supply chains.

NVIDIA's GPUs currently dominate the AI accelerator market, setting a high bar for performance, especially in training large, complex models. Intel Gaudi and AMD Instinct are positioned as strong competitors, aiming to offer competitive performance, particularly in areas like price/performance or specific workload optimizations, and providing alternatives in a market with high demand. Gaudí's architecture is specifically designed for AI workloads, using Tensor Processor Cores (TPCs) and matrix math engines. Performance comparisons are complex and depend heavily on the specific AI model, framework, and optimization level. Intel aims to compete strongly on training efficiency and cost-effectiveness, while NVIDIA maintains an edge in peak raw performance and a mature software ecosystem (CUDA).

For better understanding, refer to the table below for a side-by-side comparison.

Table 3: Product comparison between companies 

Stiff competition in PC-CPU despite secular AI growth

Still a laggard within data centre CPU, more work is needed

Source: IDC, Bloomberg Finance L.P., iFAST Compilation, Data as of 6 May 2025.

Figure 9: Server Processor Unit Share

Figure 10: Server Processor Average Selling Price

Neutral call for Intel, TP: $25, 19.0% upside potential

Intel trades at 65.5x consensus forward PE vs the SOX index of 22.0x, reflecting optimism around new leadership, cost resets and potential Foundry optimism. We believe the premium multiple embeds meaningful credit for 18A yield, Panther Lake uptake and external Foundry traction, though none are yet proven at scale. Having said that, the risk of current elevated optimism might pose a risk until the final production has come into the commercial phase. 

Applying our fair PE of 24, combining a lower than market consensus EPS, we opine a target price of $25 in FY27, which translates into a 19.0% upside potential from current price of $21. 

That said, we assign a NEUTRAL view towards the counter and believe that a more diversified exposure into SMH will be a more appropriate approach. 

Table 4: Intel’s fundamental 

Key Takeaways

Intel remains in a transitional phase, with its long-term recovery hinging on the successful execution of its 18A process node and the commercial rollout of Panther Lake CPUs by late 2025. These will be critical in validating Intel’s internal manufacturing competitiveness and its ability to regain technology leadership. At the same time, yield improvement on 18A and further traction in the Foundry segment, especially external client wins, will be closely watched, as current utilisation remains low and progress is lagging peers.

Despite benefiting from secular AI trends and continued support through the CHIPS Act, execution risks remain high. External Foundry revenue has declined, yield rates are still below commercial thresholds, and competition from NVIDIA, AMD, and Arm-based players is intensifying across both data centre and PC markets.

Given these dynamics, we maintain a Neutral stance. A fair valuation of 24x FY27 earnings yields a target price of USD 25, implying 19.0% upside. For investors seeking exposure to the semiconductor rebound or AI-driven growth, a more diversified approach, such as via sector ETFs, may offer a better risk-reward balance at this stage.