$INTC · Parkev Tatevosian, CFA · 2026-11-02

Despite reporting high demand for its central processing units (CPUs) for data centers, Intel has faced significant headwinds and challenges in its business. In addition, the company disappointed investors by telling them that 2027 would be an investment year, meaning they would spend much more on capital expenditures and reduce free cash flow until it turned negative.

Investors thought that time had passed. Investors believed that Intel's era of heavy capital expenditure and negative free cash flow was only associated with Pat Gelsinger's management and would not continue with the current management team.

Unfortunately, the company still needs more investment to capitalize on the booming data center market. In addition, Intel informed investors that the consumer segment, represented by sales of personal computers to households and businesses, will continue to suffer , as high component prices are hurting this segment, and its decline is likely to continue for the rest of the year and possibly for at least the first half of 2027.

Overall, the company's quarterly financial results disappointed investors to such an extent that the stock fell by more than 30% the day after the announcement, in one of its biggest daily declines in history.

Of course, I have been cautioning against overvaluing Intel's stock over the past month or so. But does this decline finally present me with an opportunity to upgrade Intel's stock rating to "buy"?

Intel's management team stated that their immediate priority is to provide additional supplies to meet the exceptional demand for their Xeon processor family . These are the central processing units used in data centers dedicated to artificial intelligence, while simultaneously working to enhance their product portfolio and roadmap.

This in itself was disappointing, given that Intel has spent tens of billions of dollars in recent years expanding its manufacturing capabilities, yet still does not have enough to meet current market demand.

This indicates an inefficiency in building their manufacturing capabilities. They said they had delivered another strong quarter; Revenue, profit margins and earnings per share all exceeded expectations.

Looking ahead, they believe the slowdown in the PC market will continue until at least the first half of next year , and I wouldn't be surprised if it lasted all year.

Demand for personal computers remains low because rising component prices are hurting demand in that industry . Prices are rising, therefore costs are rising, and that is why these companies are raising the prices that customers pay, but demand is not rising .

So, customers still have the same level of demand as before, but now they see prices at this level and say, "Do you know?" No thank you. I will keep my computer for another year.

This is different from data centers where demand is very high, so customers in this sector are willing to pay higher prices for components such as memory, processors and graphics processing units that go into those centers.

Because of this huge demand in data centers, demand in other consumer electronics categories such as desktop computers, laptops, tablets, and smartphones is being affected. They say they will continue to make disciplined investments in production capacity and working capital to increase supply and support future growth.

The investors were under the impression that the company had already made significant investments here over the past few years, and that they were just waiting for customer demand for products ready for sale.

Now it seems that this is not the case; they need to continue increasing their investments in capital expenditures and in their manufacturing capabilities in order to meet market demand.

Revenues rose 21% to $16.5 billion, and the operating profit margin more than tripled to 15.3%.

The current quarter was certainly strong, and better than expected, but it was the expectations and the discussion about 2027 that really disappointed investors. You can see that here in the forecasts, starting with the fourth quarter with average revenue of $15.5 billion , with gross profit margins falling to 37%.

At $15.5 billion, this would be a consecutive decline from the third quarter, when revenues reached $16.5 billion , and margins of 37% would be lower than the 43% margins achieved in the third quarter.

The fourth quarter is usually a good quarter for Intel, and sees consecutive increases. But now that the business mix has changed, with a larger proportion of revenue shifting towards data centers and time differences in supply availability to meet customer demands in that category, business has become more volatile.

The cash flow situation from operations has improved significantly . The company generated $13.2 billion in cash flow from operations in the nine months ended September 26, up from $5.4 billion in the same period last year.

This was more than the company spent on capital expenditures on property and equipment, which fell by about 10 % to $10.2 billion, resulting in the company generating free cash flow of nearly $3 billion compared to a deficit of $6 billion in the same period last year.

So the investors were thinking: "Okay, we're finally on the right track to generating positive free cash flow from now on." Then Intel surprised investors with this shocking news, saying: "No , do you know what?"

"In 2027, we will need to invest more, and it will be another year of negative free cash flow."

Thus, investors were already feeling impatient with the previous management team, which had achieved consecutive years of negative free cash flow due to its intensive investments.

Now, they thought the current management team would be more disciplined with regard to capital expenditures.

But it's simply the realities of its business that require investment to meet customer demand in the data center sector . Therefore, Intel's stock is currently trading at a forward price-to-earnings ratio of 29, which is a reasonable valuation for the business at present, given that earnings per share are likely to rise significantly over the next few years as its data center business grows.

This is a targetable market opportunity exceeding $200 billion, and is likely to increase as a result of the proliferation of proxy AI. Therefore, I also updated my discounted cash flow assessment and had to lower my free cash flow estimates to be negative for 2026 and 2027, but I raised my 2028 estimates regarding the amount of free cash flow I think the company will generate.

Overall, this increased the intrinsic value to $51 per share, but the market price is still higher at $64. So, these are the calculations that confirmed to me that Intel stock was overvalued earlier this year when it was trading at much higher prices .

So, this 30% drop is surprising to me in that it happened all at once , but it is not surprising to me in that I already felt this stock was overvalued a few months ago.

I last updated this rating on August 6, reminding investors once again that it does not appear to be a buying opportunity. And today, I will repeat this "retention" classification .

The stock still doesn't look like a buying opportunity. He's getting close, but we're not there yet .