Intel - The Semiconductor Of The Future

| About: Intel Corporation (INTC)
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Summary

Growth in DCG, IoT, and Memory will offset declines in PC and drive growth.

Intel’s top management is a key driver in Intel’s success with strong activity in acquisitions.

An overly bearish outlook of PCs creates an opportunity for entry as the market is mispricing Intel.

Introduction

Technology companies have garnered my attention and interest due to the technological advancement the world will experience within the near future. This led me into the semiconductors, the industry that provides the components of building the future. Competition is fierce with success resting on the company's ability to produce products that provides superior advantage to its competitors. It is difficult to determine who will succeed within the industry but I have determined Intel (NASDAQ:INTC) is the horse I will place my bet on.

With advances in virtual reality, augmented reality, self-driving cars, drones, and big data, this will change the way all businesses, governments, and consumers interact with the world. This is what I believe will drive growth for Intel. Industry trends are positioned favourably for Intel's key growth segments, but their strategy for success is what convinces me that Intel will lead the future.

Market Mispricing

Historic declines of Global PC Shipments are the underlying factor why the market is mispricing Intel. From its peak of 365.4M shipments in 2011 declining to 276.7M in 2015 (Statistica), this has resulted in revenue decreasing in Intel Client Computing Group segment - $35,624M in 2011 to $32,219M in 2015. Despite decreases in CCG revenue, total revenue has increased from $54B to $55.4B respectively. Emphasis is placed on CCG representing 67% of total revenue in 2011 being reduced to 58% in 2015. This displays Intel's ability to drive growth from other areas other than its PC group.

Intel's stock price has increased by 82% from 2011 ($17.31) to 2016 ($31.55) which poses the question, is Intel really being mispriced? IYW tracks the Dow Jones U.S. Technology Index and SMH tracks the US Semiconductor Index. With SMH up 94% and IYW up 67%, Intel's stock price falls in line with its comparisons.

The market may recognize the importance that semiconductors play in the world, but does the decline of PCs instill fear in investors, thus creating an opportunity? I believe the market is overly bearish on PCs and fails to recognize the growth Intel is positioned for with Intel down 18.4% since 2015. There are three growth segments Intel is positioned to experience growth in: Data Centers, Internet-of-Things, and Memory. Since 2015, Intel has displayed innovation that no other competitor is able to rival.

Intel has made many acquisitions that fuel growth for Intel to succeed in IoT including pattern recognition, machine learning, advanced driver assistance systems, robotics, autonomous machines, and 3D technology. Intel has proven to extract value from acquisitions, with display of integrating Ascending Technologies into their RealSense camera enables drones to sense what is happening around it, avoid collisions, and detect a person's blood pressure and heat. The IoT industry is projected to grow to 1.7T in 2020 (IDC) and management's demonstration of leading in IoT is why I believe Intel will capture this growth.

Intel's 3D XPoint Technology is the biggest single advancement in memory in over 20 years. This will be a key growth segment as it is 1000x faster at copying data than a NAND-based SSD and will be able to store 1TB into a 1.5mm thick drive. This breakthrough in technology will help Intel maintain a competitive advantage amongst competitors as it will benefit all of Intel's segments from increasing memory, processing time, and reducing costs in laptops, desktops, and servers.

Lastly, Intel's Data Center Group is Intel's key pillar that will drive profit. Intel boasts a 49% operating margin in its DCG segment, in comparison to its PC group's 25%. DCG will experience enormous growth as consumers shift from traditional servers to the cloud. As more devices become smart and connected, huge amounts of data is being generated creating the need to capture and analyze the data. Cloud IT Infrastructure is projected to grow to $57.8B in 2020 (IDC) further strengthening my bullish outlook for Intel.

Valuation

Intel's current price of $30.72 indicates a significant discount to the target price of $37.00, implying a 23.74% return, which includes a 3.30% dividend. Intel has a history of consecutively raising its quarterly dividends over the past 16 years from $0.02 in 2000 to $0.26 in 2016. A target price of $37.00 was achieved through a blended DCF analysis using the Gordon Growth Method and Multiples Method.

Intel is valued at a deep discount compared with its competitors based on trading multiples such as P/E and EV/EBITDA. With Intel being judged mainly on the decline of the PC industry and reduction in efforts towards the smartphone and tablet market, Intel's share price has declined 18.4% since 2015. This presents an opportunity to capture Intel at a discount.

Evidence of Intel's ability to diversify away from the PC business into much more profitable segments such as its Data Center Group is why Intel does not deserve its harsh decline. Intel is positioned extremely well with a lead in three key growth segments, Data Centers, Internet-of-Things, and Memory.

Conclusion

Continued domination in the PC market along with strong growth in DCG, IoT, and Memory is why I do not fear the decline of the PC industry. I believe this fear creates an opportunity to exploit the market's mispricing around Intel and establish a position of Intel into your portfolios. With Intel leading in market share and product innovation, this supports my bullish perspective on Intel. Intel is significantly undervalued compared with competitors and being the leader in semiconductors, I am confident in Intel's ability to capture the industry's growth and stand as a company that leads the future.

Long: Intel Corporation Inc. | Price: $30.72 (06/27/2016) | Price Target: $37.00 | Total Return: 23.74%

Please find more details on Intel below.

Supporting Documents

  1. INTC.pdf

Disclosure: I am/we are long INTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.