Intel Stock A Better Pick Than Nvidia?

Nvidia (NASDAQ:NVDA) has been the poster child of the AI boom, with its stock surging by over 180% this year, pushing its valuation to close to $3.4 trillion. Nvidia’s revenues are on track to more than double this fiscal year led by surging demand for its GPUs which have become the de facto chips for AI applications. In contrast, Intel stock (NASDAQ:INTC) has had a tough year. The stock remains down by about 50% year-to-date and has a market cap of a mere $100 billion. Intel’s revenues are expected to contract this year. But here’s the twist: This might be the right time to rethink the AI bellwether. Why is that?

The markets are often myopic and tend to extrapolate short-term trends for the long run. In Nvidia’s case, they believe that demand for AI accelerators will hold up and Nvidia’s margins and growth rates will remain strong. On the other hand, Intel’s market share losses in the CPU space and its foundry business struggles have made investors pessimistic about its future. However, almost everything in life is cyclical and this couldn’t be more true with the semiconductor markets. Reducing positions in Nvidia and considering Intel stock could be a wise move at this juncture. Here’s why.

Nvidia’s AI Boom Might Be Front-Loaded

Companies have devoted immense resources to building AI models over the last two years or so. Now training these massive models is more of a one-time affair that requires considerable computing power and Nvidia has been the biggest beneficiary of this, as its GPUs are regarded as the fastest and most efficient for these tasks. This is evident from Nvidia’s recent revenue growth. Sales are on track to expand from a mere $27 billion in FY’23 to almost $130 billion in FY’25. However, the AI landscape may be evolving. As models grow larger in terms of several parameters, incremental performance gains are expected to diminish. Separately, the availability of high-quality data for training models is likely to become a bottleneck. With much of the Internet’s high-quality data already run through by large language models, there could be a shift from large-scale, general-purpose AI models to smaller, specialized models – reducing demand for Nvidia’s high-powered GPUs. The explosive demand Nvidia has witnessed over the last few years may very well have been front-loaded, with future growth very likely slowing.

Now, AI-related chip demand could shift from training to inference, which is the phase where trained models generate outputs. Inference is less computationally intensive and could open the door for alternative AI processors. To be sure, Nvidia will likely remain the leader by far in the inferencing space as well (it says that inferencing accounts for about 40% of its data center chip demand) but there’s certainly an opening from rivals such as AMD and potentially even Intel to gain a bit of market share.

During the initial wave of generative AI, enterprises and big tech companies scrambled to invest in GPUs due to the “fear of missing out,” without worrying about costs and returns on investments. This led to a surge in pricing power for Nvidia, with its net margins coming in at over 50% in recent quarters. However, companies and their investors will eventually look for returns on their investments meaning that they could become more judicious about AI costs going forward and this is likely to hurt margins. Moreover, besides rivals such as AMD and Intel, Nvidia’s biggest customers such as Google and Amazon are doubling down on building their own AI chips. On Tuesday, Amazon announced plans to build an AI ultracluster, essentially a massive AI supercomputer that will be built using its proprietary Trainium chipsets. This could also pose a risk to Nvidia’s business.

Intel’s Foundry Business In Ripe For Turnaround

While the narrative around Nvidia has been the AI boom, the pessimism around Intel has been due to its foundry business. The business has posted sizable losses ($7 billion operating loss in 2023) and has also faced a tech handicap versus industry leader TSMC. However, the division is poised for a potential comeback with its newest 18A process node. This technology, featuring RibbonFET transistors and PowerVia backside power delivery, promises significant improvements in terms of performance and efficiency. Intel has already secured contracts with major players like Amazon, Microsoft, and the U.S. Department of Defense for custom chip designs using the 18A process. Intel has achieved some key technical milestones with this process and the company expects external customers to move their first 18A designs into production in 2025. If Intel successfully executes this transition, it could shift the narrative around its foundry business. See why 2025 Could Be Intel Stock’s Comeback Year for an in depth look at how Intel stock could be re-rated higher.

Moreover, with Donald Trump set to return to the White House in 2025, Intel’s extensive U.S. manufacturing footprint is also likely to emerge as a much more valuable asset. Trump’s focus on boosting domestic manufacturing and reducing reliance on foreign supply chains could translate into favorable policies for Intel. Potential tariffs on foreign-made chips or incentives for domestic production could give Intel a competitive edge, particularly in its foundry division. Moreover, Intel’s status as the only U.S.-based semiconductor company that designs and manufactures leading-edge chips positions it well to win more Federal government contracts.

Intel May Offer A Better Risk-Adjusted Return

Intel stock trades at a reasonable valuation at just 23x consensus 2025 earnings. The 2025 earnings estimate is in fact depressed versus historical levels, at just about $1 per share on account of Intel’s current struggles. For perspective, Intel has reported earnings of close to $2 per share in 2022 and earnings of over $5 per share over 2021 and 2020. This means that if Intel sees earnings recover to historical levels in the coming years, the stock could similarly follow suit. The company is expected to return to revenue growth in 2024, with consensus estimates pointing to a 6% revenue increase and there are multiple tailwinds in both the chip and foundry business. Intel’s improving CPU lineup, driven by the Lunar Lake and Arrow Lake chips, positions it well for a recovery in the PC and server markets. Intel could also see incremental upside in the AI processor space with its Gaudi 2 and upcoming Gaudi 3 AI accelerators.

Nvidia, on the other hand, trades at a lofty 48x projected FY’25 earnings. While Nvidia has seen impressive growth recently, it remains to be seen if the good times will last. And at the current valuation, we see little room for error.  The risks we highlighted above could put Nvidia’s future growth and margins at risk, weighing on the company’s earnings. As the AI market shows signs of evolving, investors could see better risk-adjusted returns by moving from Nvidia to more undervalued semiconductor players like Intel. Considering the above factors, Intel may have only one way to go and that’s probably up. For Nvidia, on the other hand, things could get a bit more tricky.

[1] Returns as of 12/4/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.