According to the Wall Street Journal, Intel still has a long way to go before regaining its former glory. But the problem is that investors are acting as if the company is back on top.Intel's shares have soared 88% so far this year and have more than tripled in the past 12 months, pushing the company's market value to nearly $350 billion for the first time since 2000.When Intel reached this market value 26 years ago, it was the undisputed leader in the world's advanced semiconductor design and manufacturing. Moreover, Intel now trades at more than 130 times forward earnings, well above the 60 times peak it briefly hit during the dot-com bubble.

Intel

overvalued

Such a valuation is risky for a company still trying to drive an ambitious transformation. Even if the transformation is completely successful, the level of profitability reflected in Intel's stock price looks difficult to achieve given the changes in its business model and the competitive realities of the AI ​​chip market.

Intel shares soar

Intel is scrambling to catch up with TSMC's chipmaking technology after losing its lead several years ago. At the same time, the company is also trying to complete a complex business model transformation, that is, while designing its own chips, it also provides manufacturing services for chips designed by other companies. In addition, it is trying to regain market share lost to its server and PC processors.

All of this is still a work in progress, but some notable progress has been made. Intel reached an agreement with Nvidia in September last year to jointly develop new chips for data centers and laptops. The agreement triggered a recent rally in Intel's stock price, and some developments since then have added fuel to the stock price. Even President Trump's social media posts have had an impact: In early January, Intel shares jumped 11% in a day after Trump praised Intel CEO Lip-Bu Tan on his Truth social platform and said the U.S. government was "proud to be an Intel shareholder."

Teaming up with Musk lacks details

Over the past month, Intel struck a major chip supply deal with Google and was listed as a partner in Elon Musk's Terrafab project. The project plans to build a large-scale chip production facility in Texas to meet the needs of Tesla and SpaceX.

However, the announcement of the Terrafab project has few details, saying only that Intel will assist the project in "reconstructing silicon fab technology." "Frankly, we're not even sure what that means," wrote Stacy Rasgon, an 18-year chip analyst at Bernstein with a PhD in chemical engineering.

Chen Liwu and Musk

One trend that really works in Intel's favor is the shift in AI computing.Previously, this market has been dominated by graphics processing units (GPUs), and GPU supply mainly comes from Nvidia. However, although GPUs are still superior at training AI models, new AI tools like AI agents require a process called "inference" that is better suited to be completed by a central processing unit (CPU). Such chips typically serve as the "brains" of servers and personal computers, historically Intel's strongest markets.

"This change should provide new growth momentum for CPUs. Until recently, many investors believed that the CPU market was sluggish at best and abandoned by the market at worst." TD Cowen analyst Josh Buchalter wrote in a report earlier this month. Research firm New Street Research predicts that CPU shipments for AI servers will grow at an average annual rate of 43% by 2030.

CPU is no longer the only one

However, not all of this growth will go to Intel.Rival AMD has taken significant share away from Intel in the server CPU market over the past few years. Still, Intel's strong position in the server market will help the company capture some of the new momentum, especially as demand for replacements for traditional non-AI servers also grows. Analysts expect revenue from Intel's data center division to grow 13% this year, while the company's PC business is expected to grow just 2%, according to FactSet forecasts.

However, even increased server sales are unlikely to return Intel's profitability to past levels.Competition in the AI-oriented CPU market is becoming increasingly fierce, and ARM and even Nvidia are launching new chips. UBS analyst Tim Arcuri believes that Intel's gross profit margin is likely to reach 50% in 2030 only under the "most optimistic scenario." According to data from S&P Global Market Intelligence, Intel's average annual gross profit margin exceeded 60% between 2010 and 2020.

In the short term, Intel's data center business may still be affected by the supply constraints mentioned in its last earnings call in January. That could put pressure on Intel's first-quarter results, which it reports on Thursday.

In the long term, the prospects for the CPU chip market remain strong, but Intel's stock price performance today does not reflect a moment of pain.