Intel: Flowery Promises
Summary
- If investors want to know the current market sentiment towards Intel, all they have to do is look at the company's P/E ratio compared to its peer group.
- What we see here is that Intel is simply missing out on the current boom on an operational level.
- The only hope is a small business unit and the flowery promise that everything will be better in 2025.
Introduction
If investors want to know the current market sentiment towards Intel (NASDAQ:INTC), all they have to do is look at its P/E ratio compared to its peer group. With an almost single-digit P/E ratio, Intel looks like an absolute bargain. Investors should not forget that the company is not a flyweight but has generated a free cash flow of $21 billion in 2020 and comes at a market capitalization of $220 billion. The company is still considered a giant in the tech industry, yet the market seems to perceive it as a dwarf. Mr. Market is not entirely wrong, though. The management's execution over the past five years can only be described as disappointing. The only hope is a small business unit and the flowery promise that everything will be better in 2025.
Intel misses the super cycle
Over the past few years, a super cycle has been established in the tech and chip industry that is likely to continue for some time. Signs of this are not only the parabolic share price gains of companies like AMD (AMD), Nvidia (NVDA), ASML (ASML), and Co.
Most of these companies have also been able to increase their key operating figures more strongly than Intel.
All Intel had to show for this boom period was 2 percent revenue growth and 12 percent EPS growth in the most recent Q2. Just to put these numbers in perspective: AMD almost doubled its sales in the last quarter. Net income increased by 352 percent. For the full year 2021, AMD is planning revenue growth of 60 percent. On the other hand, Intel is projecting full-year 2021 revenue growth of 1 percent and EPS growth of 6 percent. Regardless of whether we think AMD's share price is too breezy and Intel could be a bargain from a fundamental point of view, what is clear here is that Intel is simply missing out on the current boom on an operational level.
Buy the promise?
If Intel manages to turn the corner operationally, then the stock is a bargain. The adjusted P/E ratio is just 10, and the P/C ratio of 6.8 is also below the historical average of 7 over the past ten years. And yes, Intel promises to catch up with the top group again by the middle of the decade. The promise is quite flowery. New CEO Patrick Gelsinger has ambitious plans. One goal is to catch up with TSMC. To do so, Intel wants to rely on a system from ASML. New ASML lithography machines are to do the trick. Here, Intel will be the first new customer of ASML to pilot ASML High-Numerical-Aperture-EUV (high-NA) technique, which is said to extend Moore's Law throughout the next decade:
"We see that there is a need for smaller resolutions, as well as the need to prevent double patterning. For that, high-NA is the logical successor to the 0.33 NA system for the more critical layers. 0.33 NA will then move to the layers just a little bit less critical if you look further ahead in the future," van Schoot (senior principal architect at ASML) said.
"The other reason for the high-NA tool is that we also see that we have to cope with contrast and photon shot noise. We see that we need more dose. Dose is fighting with the throughput. And for that reason, we can also help here for that with the tighter resolutions with more contrast. And if you have more contrast, then you fight this effectively, and you can keep the doses low and therefore the productivity high." (Source: Semiengineering)
And yes, it's not as if Intel hasn't had some recent successes to report. Especially the announcement to build up its foundry unit sounds promising. This strategy is necessary because companies like Apple, Google, Microsoft, and Amazon no longer buy their chips from Intel anyway but design them themselves. Intel could then at least still manufacture the chips for these companies. Thus, Intel will build two new factories in Arizona for $20 billion.
And there are already first customers for Intel's new unit. Intel will manufacture chips with its new 20A process for Qualcomm (QCOM), and Amazon Web Services (AMZN) will also use the Foundry to source and produce its server chips.
However, these deals are based on the hope that Intel can successfully deploy ASML high-NA in the middle of the decade. Intel's almost embarrassing execution of 10nm and 7nm production cast a long shadow here, and it has to be seen if Intel can manage to deliver on its promises.
Besides, there have recently been some more bright spots. For example, revenue from the Internet of Things business unit rose by 47 percent in the last quarter. The Mobileye unit was also very successful, with a revenue growth of 124 percent. Nevertheless, it will take time before these units can carry Intel's business. At about $1.3 billion in revenue, they account for only a fraction of Intel's total revenue of $18.5 billion.
At least Intel remains a cash cow, which could make it easier to finance future investments. The company is sitting on nearly $25 billion in cash and cash equivalents. So, with a debt-to-equity ratio of 22 percent, as measured by interest-bearing debt, Intel is in good financial shape. But whether that's enough depends on management. AMD CEO Lisa Su has shown that it doesn't necessarily need that much cash to pass Intel.
What's left for investors?
With an uncertain operating future, investors are only left with the fundamental valuation as a reason to buy the stock. Despite a low adj. P/E ratio of just under 10, Intel is currently in line with its historical valuation. The ratio is accordingly low in absolute terms, but Intel is not necessarily a bargain as the ratio is still in line with Intel's history.
Source: Dividend stock screener for dividend growth and income
At least a DCF analysis reveals some upside potential. Of course, it depends on each investor to what extent such models are convincing or decisive for a purchase decision since the result always depends on the data input. Nevertheless, I like to use such an analysis as another piece of the puzzle in my analysis.
As we can see below, Intel's current cost of equity is 6.29 percent, while its WACC (weighted average cost of capital) amounts to 5.59 percent. To use a somewhat more conservative approach, I will set the discount rate at 7 percent. Investors are free to calculate with a rate of 8, 9, or higher.
Source: Discount rate for Intel
I used the numbers in line with Intel's revenue growth forecast and analyst expectations. Here, I have already based the sales growth on Intel returning to growth in 2025. The scenario is, therefore, somewhat bullish. Investors should take into account that the sales CAGR has been negative for the last three years.
Source: alphaspread.com/estimates by author and FactSet
So, based on these numbers, Intel seems to be undervalued right now, offering an upside potential of one-third of its current value.
Source: alphaspread.com/estimates by author and FactSet
After all, the stock would still be below most peers in terms of a P/E ratio. But as I said, the multiples always reflect future growth. At Intel, such growth is hardly present, at least shortly, and the optimistic scenarios are also somewhat uncertain. Overall, I would therefore regard the share as fairly valued.
Conclusion
Those who invest in Intel now must hope that CEO Patrick Gelsinger delivers according to his promises. But that doesn't change the fact that Intel is currently missing out on a mega boom. For me, there are too few reasons to buy the stock. The IoT unit and Mobileye are promising but too small to carry an investment thesis in the short or medium term. I, therefore, remain on the sidelines.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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Comments (54)
"the flowery promise that everything will be better in 2025."What else could be presented?For those who haven't seen what happened at Computex 2021:www.youtube.com/...But, it has been pumping $billions Q after Q.
The market buys "hope" and "promise". Money flows to the best story, not the best company. Intel's story has been poor. But the next chapter in the story is going to be a game changer. Intel is by far the best positioned company to benefit from the US government's intervention in the chip industry. Taxpayer money is about to be funneled into on-shoring foundries and fabs. Who do you think is going to get the lion's share of that handout? When that story hits the front page, INTC will gap higher and never look back.
That's an accurate synopsis of the flood of bearish INTC articles by people that have no clue about the tech.This interview of a couple of industry analysts (one worked at AMD, the other for both AMD and Nvidia) and Sanjay Natarajan - who recently returned to Intel to lead process technology development - is worth the half hour.https://youtu.be/D4RYAAikcJgThe interviewer's comment near the end of the interview (transcribed below) is an accurate analysis of the disconnect between Wall Street talking heads and Intel's technology position.[It's such an interesting moment because what the financial analysts and financial markets are doing and the way they're talking about Intel is so markedly different from the way the technologists and technology analysts are talking about Intel. Who's right we'll see, but it's an interesting moment where people are making their career bets - I mean Sanjay you came back to Intel at this moment - people are making their financial bets with different information and for different reasons and for me what you said earlier about being at parity - I think a lot of people have misunderstood what that means - that you're talking about process technology, You're not talking about product. You're not saying, "Oh we're going to be behind AMD until 2024". People actually think Sanjay that's what's being communicated, so I'm glad we get moments like this to clarify at least what Intel is saying.]
Replacing a puppet CEO with a clown one won’t help neither.
And as far as it’s price action, it is quite consistent; keeps in 30-60 range. A good toy for scoop traders. Investors have long made their choice and picked AMD and Nvidia.
Intel's pluggable optics are ramping into 200G, 400G and sampling 800G.Optane memory is becoming a must-have feature in hpc.Intel's eASIC chips are becoming a popular solution in 5G infrastructure processing, replacing FPGAs.Xe GPUs will likely ramp quickly, considering the current scarcity of GPUs... crypto mining, AI processing, gaming booms. Mobileye is developing a data services business also. You never know what will take off.www.mobileye.com/...
TSMC is the supplier of too many business, and not only Apple or AMD with cutting edge node, but so many more customers on older nodes...
We may have "Chip Shock!" Like oil shock .. but we already had "Lumber Shock" that was beyond shock and maddness!! Have you looked at those OSB boards on the shelves for prices?? 500% or worse! I reemmeber just $11 per OSB plywood board now it is $60 or higher.. it may be falling by now.
It seems likely that chip prices will double triple quadruple depending on availability . Customers can delay but many just cannot because of obvious reasons unless they resort to buying used chips and stuff. which is possible.
Now with Intel as the biggest X86 manufacturer and to have its revenue doubled or tripled in a short order is something amiss in your analysis above.. It can happen or it wil not happen.. your decision!