3 Reasons Why Intel Is an Acquisition Target

Intel (NASDAQ:INTC) stock rose more than 9% on Jan. 17 after online news site SemiAccurate reported that a mystery buyer expressed interest in buying the company. That put the spotlight on the troubled chipmaker that once dominated the semiconductor industry.

Intel's woes have taken the stock down to multiyear lows, and some indications point to the overdone pessimism that arguably makes it an acquisition target. The prospective buyer may have a point for three reasons.

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1. The stock's valuation

In this case, valuation does not refer to the P/E ratio, which is more than 100 thanks to falling earnings. Instead, the valuation issues revolve around the stock's book value, specifically its price-to-book ratio.

The book value is the value of a company's stockholders' equity. In other words, it represents the leftover value of a company if it sold its assets and paid off all its liabilities. Even after the most recent surge in the stock price, Intel's book value multiple is just over 0.9, meaning the company could theoretically increase in value by 8% just by liquidating.

Nonetheless, this likely also represents significant undervaluation, even for a company like Intel. In comparison, the average S&P 500 stock sells for more than 5 times its book value. Hence, it is little wonder that bargain hunters have set their eyes on this stock.

2. Intel's foundry business

Despite its troubles, no company operates more foundries on U.S. soil than Intel. But even with that advantage, the proportion of worldwide chip production in the U.S. has fallen from around 40% in 1990 to just 12% in the 2020.

This has alarmed politicians on both sides of the aisle. To that end, the Biden administration passed the CHIPS Act, allocating $53 billion to domestic chip production.

Although foreign companies like Samsung and Taiwan Semiconductor Manufacturing Company have attracted some of this money, Intel's foundry presence and previous pledges to invest tens of billions of dollars in state-of-the-art foundries could eventually make it one of the top chip producers in the world. Thus, an eventual Intel revival is a distinct possibility.

3. The current semiconductor market

Admittedly, many investors wrote off Intel after it fell behind competitors like AMD and Nvidia technically. Also, the sudden demand surge for AI accelerators likely doomed the goals of former Intel CEO Pat Gelsinger, who had hoped to make Intel the technical leader again by this year.

However, investors tend to focus almost exclusively on the leading edge of the semiconductor market, forgetting that demand for less technically advanced chips is still tremendous.

To this end, Intel generated nearly $36 billion in product revenue in the first nine months of 2024. Even when excluding the $13 billion of revenue tied to the foundry business, Intel remains a major force in its industry.

Additionally, investors should remember that companies like GlobalFoundries in the U.S. and United Microelectronics in Taiwan operate large-cap businesses around older chip designs. In TSMC's case, 26% of its revenue in the fourth quarter of 2024 came from chips larger than 7 nanometers. Hence, although this segment is unlikely to drive premium stock valuations, it remains a significant revenue source for the semiconductor industry.

Intel as an acquisition target

Considering the state of Intel, it is easy to see why a larger-scale acquirer has shown an interest. The company is unlikely to become the industry leader again, and its stock probably will not outperform the top industry names.

Nonetheless, a book value below 1 points to considerable undervaluation. Moreover, industry and political forces could make it a top foundry in time, and its chip business continues to generate significant amounts of revenue despite lagging technically.

Time will tell whether an outside entity buys out Intel. However, given its current state, investing in the semiconductor stock could profit value investors.

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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.