Intel Downgraded by BofA and HSBC: Is a 50% Monthly Surge Overly Optimistic?

TradingKey - Intel's stock has surged over 50% this month, with its market capitalization growing by $80 billion in recent months. However, major financial institutions have continued to downgrade its rating. 

HSBC has lowered its rating from "Hold" to "Reduce," and Bank of America has adjusted its rating from "Neutral" to "Underperform," citing that the recent stock gains lack a solid foundation and exceed the value improvements from balance sheet enhancements and chip foundry opportunities.

HSBC analysts pointed out that Intel's recent rally stems from investments by the U.S. government, SoftBank, and Nvidia. Meanwhile, BofA attributes the surge primarily to the company's stronger balance sheet and foundry potential. However, both institutions noted that Intel has not achieved any substantial operational improvements.

The core issue lies in Intel's consistently challenged foundry business, which has yet to secure effective customer support, according to HSBC. As for its foundry operations, BofA highlighted that Intel still relies on TSMC for approximately 30% of its production, and uncertainties remain about its 18A and 14A process nodes.

Additionally, BofA believes that Intel's flexibility to divest its persistently loss-making foundry division has significantly diminished. With the U.S. government's backing, the company might be compelled to continue domestic foundry operations regardless of profitability, limiting potential spin-off benefits. BofA anticipates that Intel will struggle to achieve meaningful progress in chip manufacturing over the next few years, posing a downside risk to its stock price if outcomes fall short of expectations.

Beyond its lagging foundry business, BofA also pointed out that Intel's traditional strength in CPU markets is being eroded by competitors AMD and ARM in the server and PC chip markets due to its outdated process technology. BofA notes that while updating its PC technology could slow market share decline, regaining dominance in the near term is unlikely.

Furthermore, the lack of development in AI accelerator chips is a more severe issue compared to the outdated CPU processes. BofA projects that by 2030, the total addressable market (TAM) for data center infrastructure could reach approximately $850 billion to $900 billion, with AI accelerators potentially accounting for $700 billion, whereas CPUs might only capture a market size of $250 billion to $500 billion.

On Monday, Intel shares rose 2.45% as semiconductor stocks rallied, but pre-market trading on Tuesday saw a decline of over 3%.