Chip stocks have been in focus this year amid great expectations for artificial intelligence (AI), with the VanEck Semiconductor ETF (SMH) boasting a 2023 gain of 43.5% - far outpacing a 24% return for the Nasdaq 100 Index ($IUXX). However, not all semiconductor giants are performing equally well.

In fact, industry heavyweight Intel (INTC), valued at $159.89 billion, has trailed the broader markets by a wide margin in the last two decades. Since September 2003, Intel stock has returned just 123%, compared to the game-changing returns of 1,158% provided by the Nasdaq QQQ Invesco ETF (QQQ), which tracks the performance of the Nasdaq 100 Index.

And when you compare Intel’s returns with peers such as Nvidia (NVDA), the performance gap is even wider. In the past 20 years, Nvidia stock has returned a whopping 30,341% and is now valued at a market cap of $1.14 trillion.

Narrowing our focus to more recent times, INTC has gained 28% over the last 52 weeks, compared to 43.5% for the wider SMH.

So, what's behind the underperformance in Intel - and how should investors approach this tech giant?

Inside Intel's Revenue Decline and Foundry Fumbles

While rivals like Nvidia and Advanced Micro Devices (AMD) continue to grow sales at an enviable rate, Intel’s revenue has fallen from $71.9 billion in 2019 to $63 billion in 2022. In the last 12 months, sales contracted even further to $54 billion. For the June quarter, Intel reported sales of $12.9 billion, a decline of 15% year over year. Comparatively, adjusted earnings per share fell by 54% to $0.13. The results managed to beat expectations, which called for a per-share loss and an even steeper drop in revenue.

Earlier this year, Intel announced its intention to buy Tower Semiconductor (TSEM) for $5.4 billion to boost its foundry business. Tower Semiconductor is a foundry for analog semiconductor solutions, and the acquisition would have enabled Intel to add specialty solutions on legacy process nodes, unlocking another revenue stream for the tech behemoth. But China refused to approve the deal, and Intel will shell out $353 million in termination fees as a result.

Intel recently disclosed a new partnership with Tower Semiconductor, which could give an alternate boost to Intel’s foundry ambitions. As per the agreement terms, Tower will invest $300 million to install equipment at Intel’s manufacturing facility in New Mexico, providing capacity for over 600,000 photo layers each month. Tower explained it will use the capacity at the New Mexico facility to manufacture chips for radio frequency and power management. 

Intel is betting big on the expansion of its foundry business, which might bring in billions of dollars in sales each year - providing it with the tools to compete with Taiwan Semiconductor (TSM). In fact, the global foundry services market is forecast to surpass $200 billion by 2028, providing Intel with enough room to stage a turnaround. 

What Do Analysts Expect for Intel?

Analysts currently expect Intel's sales to fall by 22.4% year over year to $48.91 billion in fiscal 2023, while earnings are projected to narrow by 68% to $0.58 per share, given the cyclical nature of the semiconductor industry.

But as demand rebounds next year, Intel is forecast to grow revenue by 11.9% to $54.7 billion in 2024, with earnings anticipated to recover by 186% to $1.66 per share. So, INTC stock is priced around 3x 2024 sales and 22x forward earnings, which is not too expensive. 

Intel stock is forecast to end 2027 with adjusted earnings per share of $2.75. If it's valued at 20 times forward earnings, the stock should trade around $55 by the end of 2026, which indicates an annual return of 13%. 

That said, analysts see relatively unenthusiastic about the prospect of actually buying INTC shares. Out of the 32 analysts covering Intel, three recommend a “strong buy,” three recommend “moderate buy”, an overwhelming 21 recommend “hold,” 1 recommends “moderate sell,” and four have “strong sell” recommendations, for a consensus “hold” opinion overall.

Plus, Wall Street has an average price target of $35.03 for INTC stock, which is 8.7% below current levels. 

All things considered, the risk-reward profile for Intel is not too attractive right now, as there are far better stocks you can buy in the semiconductor industry that have the ability to deliver outsized returns to investors.