Valuing Intel Like Its Peers Yields A $210 Price Target

Summary

• AMD and Nvidia continue to trade at astounding multiples. The market seems to like their growth and potential.
• Lagging behind is Intel, despite having the same growth and potential for future continued growth.
• Valuing Intel like these two peers at a 35 P/E ratio yields a $210 price target.
• While perhaps unrealistic given the current ~$60 price, the potential reward far outweighs the risk.

Investment Thesis

When compared to its peers/competitors AMD (AMD) and Nvidia (NVDA), Intel (NASDAQ:INTC) is valued very cheaply at a 13x forward P/E and 11.5x trailing P/E. This is despite Intel benefiting from the same tailwinds as the former two companies.

While multiple expansion is all but guaranteed, it suggests the potential reward could be much bigger than the risk, when taking a position in the company. This thesis echoes a recent article by another author.

Comparison to Nvidia

A recent SeekingAlpha article covering Nvidia states the following:

Nvidia's transformation into a data-centric computing platform is in full swing. The closure of the Mellanox acquisition deal should provide added momentum to Nvidia's data center business, which was already growing at more than +50% (3-yr CAGR).

Nvidia's AI-powered GPU's in conjunction with Mellanox's high-performance computing chips & high-speed networking components could make Nvidia the top choice for next-gen data centers. As a result, I expect data center revenues to overtake gaming at Nvidia in the next couple of years.

(…)

According to my valuation, Nvidia is still undervalued, leaving room for further upside.

It is not difficult to conceive writing a similar article, but replacing Nvidia word for word with Intel, as indeed Intel has been in a (similar) data-centric transformation for several years now. Further replacing Mellanox with Barefoot Networks (Intel's 2019 acquisition to answer Nvidia's), and data-centric revenue overtaking PC revenue (which indeed was the case in Q1), instead of gaming/GPU revenue in Nvidia's case, strengthens the point.

In other words, Intel’s AI-infused CPUs in conjunction with its broad accelerator offerings such as FPGAs, Habana ASICs for AI (another 2019 acquisition) and Intel’s discrete GPUs, and even further enhanced by Intel’s Optane and 3D NAND memory and storage and Intel and Barefoot Networks’ silicon photonics and switches, will all but let Intel remain the top choice for current and future data centers.

As a result, Intel will continue to benefit from the data economy to a similar extent as Nvidia.

Moving to valuation, equivalently, according to relative multiples, Intel is still undervalued, and vastly more so than Nvidia, leaving room for further upside.

Another article yields the same conclusion, as its author targets a 35x multiple for Nvidia:

Based on my view that NVDA's medium-term earnings power will only become apparent by FY24, I apply an ~35x multiple to FY24 core earnings of ~$15/share on a fully diluted basis, (...) leading me to a ~$420/share valuation (~16% upside).

Comparison to AMD

Another recent SeekingAlpha article, about AMD now, describes:

To reach $70, AMD probably needs to earn $2 per share for the 35x P/E multiple. Nvidia (NVDA) already trades at the same forward P/E multiple with a $210 billion market cap so AMD at a $62 billion valuation isn't restricted by any size limits. In fact, AMD has come more in line with Nvidia valuation over the last year.

If there has been any sort of convergence in relative valuations in the last year (towards this 35x number), Intel obviously hasn’t been part of that, as it trades at a forward P/E multiple of 13x. This implies Intel trades at an almost 3x 'discount' to its direct peers.

Admittedly, Intel’s percentage growth isn’t as high, with a 3-year revenue CAGR of a bit under 8%. But this is merely due to the law of large numbers, as in those three years Intel has almost added the TTM revenue of AMD and Nvidia combined to its top line.

Intel: Heading to $210?

Imitating the AMD article above, to reach $210, Intel probably needs to earn $6 per share for the 35x P/E multiple. AMD and Nvidia already trade around the same forward P/E multiples, so Intel at a $900 billion valuation isn’t restricted by any size limits.

At its 2019 investor meeting, Intel had guided for $6 per share by 2023 at the latest, which is where the $210 PT is based on.

Growth Drivers: Intel’s data-centric and edge dominance

The Nvidia article above summarized that company’s growth drivers as follows:

1. Robust data center growth will increase Nvidia's free cash flow,
2. The gaming and pro-viz segment are still growing, albeit slower, and
3. The autonomous vehicle segment could yet be a gamechanger for Nvidia.

The Intel equivalent would read like this:

1. Robust data center growth (including 5G) will increase Intel’s FCF while PC remains stagnant;
2. 3D NAND, IoT, FPGAs and silicon photonics are growing at a healthy clip, in line with or better than the data center CPUs;
3. Mobileye/Moovit and Optane memory could be gamechangers for Intel;
4. Intel will challenge Nvidia with highly competitive discrete GPUs and deep learning accelerators from Habana.

Risks

Intel has not traded at anywhere close to the 35x multiple that analysts and investors are targeting for its peers AMD and Nvidia. There are also no visible signs of this valuation changing overnight or even longer-term.

Nevertheless, this does not take away from the observation that, indeed, Intel’s relative valuation is very favorable compared to its biggest competitors. So rather than expecting Intel to rally to a price close to $210, this relative valuation might be seen more as an indicator of risk/reward.

However, I see two factors that show a higher valuation for Intel on a longer-term basis isn't unfeasible.

The only real catalyst I see that might drive real multiple expansion is Mobileye's leadership in autonomous driving becoming apparent (financially and competitively), as this will expand Intel from a PC and data center (+ edge) company to also an automotive player as third (fourth) pillar, which could drive significant growth long-term and investor money, as Tesla (TSLA) shows. But this is likely many years out.

Secondly, some other comparisons show that even trillion dollar companies could indeed be valued at P/E multiples of over 30. Microsoft (MSFT) and Google (GOOG) currently trade at 32x, and Apple (AAPL) is close at 27x.

Summary

The AMD article closed out as follows, and I suggest replacing AMD with [Intel], as the investment thesis is very much alike:

The key investor takeaway is that any base case for AMD [Intel] is substantial revenue and profit growth over the next few years. The high-performance chip company has the roadmap for years of new products to compete against Intel [AMD] and Nvidia for best-in-class products. The case for a higher stock price such as $70 [$210] is easily made by reliable EPS forecasts for 2021 [2022-2023], not by looking backwards to 2019 and prior earnings.

The only real difference I see is that AMD's growth is mostly based on the PC (at least as of now), while Intel's growth is based on becoming ever less reliant on the stagnant PC business as it has expanded into higher growth areas such as 3D NAND, IoT, GPUs, cloud, 5G, silicon photonics and automotive.

Concerning the roadmap point for “best-in-class products”, I would note that Intel’s 10nm delays are widely documented. While this obviously does not take away from AMD too having a strong roadmap, potentially, I'd argue that Intel’s relative position will only become stronger as it leaves those delays behind. (This implies that AMD's competitive position will only decline going forward as Intel gets back to a regular Moore's Law business.) This is equivalent to the call of the author to not look backwards to AMD’s 2019 and prior earnings: do not look back to Intel’s 2019 and prior roadmap and product portfolio to assess its future competitiveness.

Takeaway

Putting it blatantly, based on just relative valuation to its technology peers, Intel's share price could double and the stock would still not be expensive.

As a data-centric conglomerate, Intel has by far the broadest portfolio of any company out there for the data economy, covering all aspects of computing and semiconductors. As a result, Intel has the largest addressable market and is vying for a $300 billion TAM in the next few years (which does not even include a >$200B automotive TAM by 2030 for Mobileye).

What Intel lacks in percentage growth compared to its peers/competitors (even though neither AMD nor Nvidia excelled in that aspect in 2019), it arguably makes up for in scale and market share. Nevertheless, the $300B TAM implies that Intel also has good medium and long-term growth prospects.

Intel has guided for $6 earnings per share over the next few years, so valuing Intel similar to its competitors at the suggested 35x multiple yields a $210 price target (and closing in on a $1T valuation). Of course, as discussed in the risks section, this should be viewed mostly from the context of a risk/reward point of view rather than a formal (near or medium term) forecast.

Given some of the technical and competitive aspects of the 10nm delays in recent years, as I mentioned, I would personally not expect a real change in Intel P/E valuation until the 7nm era in 2022-23 sheds more light to investors on Intel's innovation pipeline. This is similar to the plan Intel laid out at its 2019 investor meeting ($85B/$6 EPS, based on "distancing" itself from the competition at 7nm).

I might detail a more direct (rather than comparative) argument for a $210 (or similarly ambitious) price target in a future article, so feel free to consider following.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.