Where Will Intel Stock Be In 5 Years?

Summary

• Despite topping consensus estimates for both earnings and revenues in recent quarters, Intel’s valuation has continued to underperform against industry peers.
• Yet, the newly announced IDM-2.0 business model under new CEO Pat Gelsinger’s leadership may be able to turn its prospects around over the next five years.
• Intel will return to its foundry roots with "Intel Foundry Services" under IDM-2.0. The company will expand its manufacturing capabilities to global peers, effectively taking advantage of rising semiconductor demand.
• The company's five-year product roadmap will also bolster its ability to capitalize on market opportunities made available by global digital transformation trends ahead.
• The next five years will be pivotal for Intel, as it continues to progress towards regaining its former glory as the industry leader. The materialization of Intel’s five-year growth roadmap is expected to catapult its valuation prospects back into the lead, with upside potential of more than 40%.

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Despite topping consensus estimates for both earnings and revenues in recent quarters, Intel’s (NASDAQ:INTC) valuation has continued to underperform against industry peers like Nvidia (NVDA) and AMD (AMD). During the second quarter, Intel reported earnings of $1.28 per share, beating average analyst estimates of $1.07 per share by almost 20%. The achievement also topped prior year earnings and management’s guide by approximately 3% and 22%, respectively. Second quarter revenues were also strong on unprecedented demand for PC units, paired with signs of recovery in both its Internet of Things Group (“IOTG”) and Data Center Group (“DCG”) businesses. With the favorable trends expected to persist through to the end of the year, Intel management has raised its full-year earnings and revenue guidance for the second time to $4.80 per share and $73.5 billion, respectively.

While Intel may have underperformed the market and its peers in recent years, the newly announced IDM 2.0 business model under new CEO Pat Gelsinger’s leadership may be able to turn its prospects around over the next five years. The IDM 2.0 business model will underscore Intel’s ambitious plans to regain its position as the industry leader in semiconductor development and production. One of the major initiatives under IDM 2.0 is to expand Intel’s global foundry capacity through “Intel Foundry Services” (“IFS”), and foster further growth by partnering with industry peers. IFS is also slated to benefit from the U.S. government’s goals of boosting domestic semiconductor production and limit the sector’s reliance on imports.

The pandemic has also created a structural shift in demand for portable devices like smartphones and laptops to accommodate agile work and learning dynamics. Despite near-term impacts from supply chain constraints, increasing PC density makes strong tailwinds for Intel’s largest business unit. Intel’s past several years of investments into building out its AI, 5G, and intelligent autonomous edge technological capabilities are also expected to pay large dividends in the long run as the era of digitization continues to underpin demand for its products.

Intel’s transformative business model, coupled with global digitization tailwinds will bolster its roadmap for regaining industry leadership. Considering the stock’s current valuation, which trails behind its peers by a wide margin, the flawless execution of Intel’s comeback plan in the next five years could materialize into significant upside potential ahead. We believe higher valuations are in place for Intel, as it reaches for technology and performance parity with industry peers, and regain market share in the long run.

IDM 2.0 and IFS

2021 will be a pivotal year for Intel as it returns to its foundry roots under the leadership of new CEO Pat Gelsinger. Under the new IDM 2.0 business model, Intel will return to making chips for its industry peers around the world under “Intel Foundry Services” (“IFS”). The company has already allocated $20 billion towards the construction of two new factories in the U.S. to increase its domestic production capacity for both internal use and for its customers.

The strategic expansion comes at an opportune time as global digitization across every industry continues to accelerate at an unprecedented pace, which has driven a widening divergence between demand and supply for semiconductors. Foundry is expected to grow into a $100 billion market over the next five years, and much of this projected growth will be driven by demand for new computing technologies such as AI, cloud, 5G and edge computing.

The support coming from the U.S. government to bolster American chip production also makes strong tailwinds for Intel’s new strategy. The Biden administration had recently pledged $52 billion towards building out domestic production and supply of semiconductors as part of efforts to minimize reliance on imports, and reestablish its “chip supremacy” from Asia.

To date, IFS has already captured the interest of more than 100 potential customers, and has inked deals with major names including Qualcomm (QCOM) and Amazon (AMZN). In addition to reclaiming market share from rivals like Taiwan Semiconductor Manufacturing Company (TSM), IFS will also enable profit-sharing for Intel as it engages in business with industry peers in the high-growth environment.

Accelerated PC Demand in the Post-Pandemic Era

The last 18-months of pandemic-related lockdowns have irreversibly transformed work, learning and social dynamics. More than 34 million units of desktops, laptops and multi-purpose tablets were sold between January and March 2021 in the U.S. alone. Laptops and multi-purpose tablets were preferred choices, driven by the heightened need for portable and convenient computers to facilitate remote working and studying arrangements during the pandemic.

Intel’s largest business unit, Client Computing Group (“CCG”), has been a beneficiary of this growth trend in recent quarters. Driven by record-setting notebook unit volumes, CCG has reported revenue growth for five consecutive years. The surge in PC sales is expected to persist into the long run, considering the escalating adoption of hybrid working and studying arrangements, which will drive the need for portable workstations in the post-pandemic era. The coming refresh cycle propelled by the need to replace more than 400 million PCs that are currently more than four years old will also expand the overall total addressable market (“TAM”) for PCs.

Global demand for PCs is expected to grow at a compounded annual growth rate (“CAGR”) of 8.5% into 2025 and reach a market value of $224.3 billion. Much of this growth will be led by the education sector, which is expected to grow at an accelerated CAGR of 13.31% through to 2025. The growth potential is further corroborated by opportunities outlined during the second quarter, where “the number of PCs per 100 students and teachers remains in the single-digits”, underpinning significant headroom for PC growth ahead.

And Intel is well-positioned to capitalize on this opportunity with the deployment of new operating systems and the EVO platform to deliver enhanced performance suited for an optimized user experience. More than 150 PC models currently available in the market are equipped with Intel’s latest 11^th Gen Intel Core processors, exposing Intel to significant opportunities in both commercial and consumer markets ahead. Our base case forecast projects CCG revenues of $38.6 billion by the end of the year, which remains relatively flat from the prior year due to impacts from the ramp-down of Apple’s (AAPL) modem business, the segment’s exit from the home gateway business, as well as ongoing supply chain constraints. However, CCG revenues are expected to take off in proceeding years at a CAGR of 8.5% towards $58.1 billion by 2025. The accelerated growth will be underpinned by increasing PC demand, especially in the education sector as online education and remote classrooms become the post-pandemic norm. Lower overall average selling prices (“ASPs”) resulting from education segment PC sales are expected to be compensated from volume growth according to market projections, and bolster CCG revenues into the long run.

Source: Author, with data from our internal financial forecasts (Intel_-_Forecasted_Financial_Information.xlsx__-__Group.pdf).

Improving DCG Demands

On the other hand, Intel’s DCG business unit has experienced a 17% year-over-year setback in revenues during the first half of 2021, to which management blames on “cloud digestion”. The notion refers to impact from cloud customers who have front-loaded their chip orders in previous quarters, and are now in a “digestive” period of installing these chips into data centers before making any new orders. The situation was further exacerbated by slowed demand from the enterprise and government market segment due to pandemic-related disruptions, which has since been alleviated.

But signs of recovery across the business unit’s cloud, enterprise and government market segments have since prevailed stepping into the second half of the year. And global digitization accelerated by new technologies like AI computing, cloud, connectivity and edge infrastructure is expected to drive further growth opportunities for the segment. The data market is expected to grow at a CAGR of 9.9% up to 16.9% through to 2025. The majority of this growth will be led by global demands for cloud and edge computing. The global cloud computing market is forecasted to grow at a CAGR of 17.5% towards a market value of $832.1 billion by 2025, as enterprise customers transition away from traditional IT infrastructures. Meanwhile, the global edge computing market is expected to grow at a CAGR of 29.4% towards a market value of $8.3 billion. The growth trend is driven by the advent of high-speed networks like 5G, which have accelerated the speed of data creation and increased the need for edge data centers to accommodate latency requirements for data sharing.

The market opportunities ahead, paired with Intel’s continued innovation, including volume ramp-up on the 10-nanometer based Xeon Scalable processors, are expected to bolster DCG’s performance in the long run. With recovering sales in the second half of the year, our base case forecast projects full-year DCG revenues of $23.2 billion for 2021, which remains slightly down from the prior year. And as demand from the enterprise and government, and cloud segments continue to accelerate on market tailwinds, DCG revenues are forecasted to grow at a CAGR of 10% towards $37.2 billion by 2025.

Source: Author, with data from our internal financial forecasts.

Strength in IOTG in the Era of Global Digital Transformation

The advent of technology has enabled more industries, ranging from retail to healthcare, to capitalize on data creation and create value. And Intel’s IOTG business unit continues to be committed in developing solutions to streamline this process. Intel’s IoT product capabilities include the 11^th Gen Intel Core processors, Intel Atom x6000E series processors, Pentium processors, and Celeron N and J series processors, which are all infused with AI technology to drive optimized computing performance in the era of digital transformation.

The global IoT market is expected to grow at a CAGR of more than 19% towards a market value of $480.4 billion by 2025. Specifically, the industrial IoT market will lead the sector’s growth with a projected TAM of $421.3 billion by 2025 due to increasing automation and reliance on data-driven outcomes. The growing prominence of new technologies like AI and 5G is also expected to drive adjacent revenues to Intel’s IOTG business unit.

IOTG’s continued commitment to developing high-performance computer platforms needed to accommodate global digital transformation is expected to bolster its long-term capitalization rate on the sector’s growth trends. The business unit is expected to end the year with $3.4 billion in revenues, up 14% from the prior year as demand for IOTG products continues to surge amid economic recovery. The business unit’s sales are forecasted to further grow at a CAGR of 21% towards $8.9 billion by 2025, which is in line with historical performance, as well as forward-looking growth opportunities in the segment. The business unit’s anticipated growth is also expected to boost its share in Intel’s total revenues up from approximately 4% in 2020 to 7% by 2025.

Source: Author, with data from our internal financial forecasts.

The Critical Role of Mobileye

Intel’s acquisition of autonomous vehicle technology company Mobileye in 2017, accompanied by the subsequent acquisition of mobility-as-a-service (“MaaS”) solutions firm Moovit in 2020 were prudent moves. The purchase decision early on was almost prescient as global adoption of advanced driving assistance systems (“ADAS”) and autonomous driving technology reaches an inflection point.

ADAS features like adaptive cruise control, lane departure warnings, and blind-spot detection now usually come as standard in new vehicle. The technology has played a critical role in ensuring road safety, with many global regulating bodies now mandating new vehicles be equipped with specific ADAS features in efforts to reduce road casualties. Beginning mid-2022, all new vehicles in the EU will have to be equipped with specific ADAS features, including advanced emergency braking systems, lane-keeping detection, and speed assistance. The U.S.’s National Highway Traffic Safety Administration (“NHTSA”) has also recently recommended ADAS features as an effective tool in removing human error from potential crashes. The global market for autonomous driving technology is expected to grow at a CAGR of 14% up to 28.5% over the next five years, making strong tailwinds for Mobileye. The majority of this growth will be led by the robotaxi sector, which is expected to grow rapidly at a CAGR of 60.7% up to 120.5% through to 2025.

As a global leader in the development of ADAS and autonomous driving technology, Mobileye is poised to benefit from the auto industry’s new trend. Mobileye’s latest fifth-generation EyeQ chip is already capable of supporting level 5 autonomous vehicles, which will not require human attention once regulations approve. The chips are currently used in supporting more than 37 vehicle designs globally through partnerships forged with over 25 OEMs, including Ford (F) and BMW (OTCPK:BMWYY). The business unit has also expanded its autonomous vehicle testing program from Israel to New York City, one of the busiest driving environments in the world, to train and prepare its autonomous driving technology to navigate even under the worst road conditions. Mobileye also plans to deploy robotaxi services in Munich and Tel Aviv in 2022, taking advantage of Germany’s new federal law for promoting the research and development of autonomous driving technology.

In order to capitalize on surging semiconductor demands that have outgrown supply within the automotive industry, Intel has also decided to dedicate production at its Ireland plant for manufacturing automotive chips. The company expects more than 20% of new vehicle costs to step from chips, driving the sector’s market value towards $115 billion and accounting for more than 10% of the global semiconductor market by the end of the decade.

On this basis, we see Mobileye’s contribution to Intel’s total revenues rise from 1% in 2020 to at least 4% by 2025. The accelerated sales growth observed in the first half of the year is expected to drive annual revenues towards $1.3 billion by the end of the year. Our base case forecast projects Mobileye revenues to further grow at a CAGR of 28.5% towards $4.6 billion by 2025, as global adoption of autonomous driving technology and robotaxis continue to materialize.

Source: Author, with data from our internal financial forecasts.

Developments in Memory Products and Programmable Semiconductors

Late in October of last year, Intel entered into an agreement to sell its NAND SSD business to SK Hynix as part of efforts to pivot its focus towards emerging technologies like AI, 5G and edge computing. The segment had previously accounted for more than 90% of Intel’s Non-Volatile Memory Solutions Group (“NSG”). Following close of the transaction, which is expected to occur later in the year, NSG will continue to operate Intel’s Optane business.

The business unit’s lost revenues from the sale of its NAND business are expected to be compensated by adjacent revenues resulting from the surge in demand for AI, 5G and edge computing products, as well as increasing demand for non-volatile memory chips like Intel’s Optane persistent memory products. The global non-volatile memory technology market is expected to grow at a CAGR of 13.2% through to 2025, creating attractive opportunities for Intel’s latest second generation Intel Optane technology. Intel’s latest second generation Intel Optane technology boasts higher performance, density, power, non-volatility, and cost advantages, which are required to support increasing data creation, and resulting storage and memory needs.

As NSG continues to ramp down its NAND business, 2021 revenues are forecasted at $4.3 billion, down about 20% from the prior year. And in the following year, our base case forecast projects NSG revenues to drop as low as $300 million, generated exclusively from Intel’s Optane business. Segment revenues are expected to expand at a CAGR of 13% towards $500 million by 2025 based on historical sales of Intel’s Optane persistent memory products, as well as non-volatile memory market trends over the forecasted period.

Source: Author, with data from our internal financial forecasts.

Intel’s Programmable Solutions Group (“PSG”) is also slated to benefit from the global transition to next-generation technology. PSG offers a broad range of programmable semiconductor products for application across communications, cloud and enterprise market segments:

• Application Specific Integrated Circuit (“ASIC”) – ASICs are integrated circuits programmed for specific use and application. The global ASIC chip market is expected to grow at a CAGR of 8.2% towards a market value of $24.7 billion by 2025. The sector’s growth will be primarily driven by the increase in demand for ASIC application in consumer electronics, smartphones and cars. The newest Intel eASIC N5X device family enables low-latency 5G network acceleration, which will benefit from the rise in 5G adoption – the global 5G services market is expected to reach a market value of more than $664 billion before the end of the decade, registering accelerated growth at a CAGR of 46.2%. Intel’s structured ASIC products also allow for greater cost-efficiencies through faster time-to-market and lower one-time engineering costs, which will benefit the segment’s margin expansion in the long run.
• Field Programmable Gate Array (“FPGA”) – FPGAs are programmable circuits that can accommodate the fast-changing nature of modern-day technology requirements. A single FPGA can potentially consolidate discrete components because of its versatile nature. Specifically, the circuits could be programmed and configured to facilitate a certain function, and be reprogrammed whenever changes are required. Intel’s FPGA product portfolio currently includes the Intel Startix 10 FPGA family and the FPGA SmartNIC platform family, which enables low-latency AI acceleration, cloud data center applications, as well as communications segment applications. The global FPGA market is forecasted to grow at a CAGR of 8.5% over the next five years, as rising adoption of emerging technologies continues to bolster demand.

Based on growth trends within the global programmable solutions market and the competitiveness of Intel’s PSG products, the business unit is forecasted to generate revenues of $1.8 billion by the end of the year. PSG sales are expected to further accelerate at a CAGR of 8% towards $2.7 billion by 2025, as adoption rates for new technologies like AI, ADAS, 5G, and edge computing continue to ramp up.

Source: Author, with data from our internal financial forecasts.

Overall Financial Prospects

The growth catalysts within the semiconductor sector will underpin Intel’s growth trajectory over the next five years as the global transition to digital continues to take place. Combining the above segment revenue projections with other ancillary sales, Intel is expected to generate net revenues of $73.7 billion by the end of the year, with growth at a CAGR of close to 10% towards $113.4 billion by 2025.

Source: Author, with data from our internal financial forecasts.

Intel’s cost structure is expected to experience pressures through to 2023 considering the continued build-out of IFS under the new IDM 2.0 business model, ongoing product portfolio expansion, and 10-nanometer wafers production ramp. Consolidated gross margins are expected to trend from 57% by the end of this year towards 62% by 2025, while operating margins trend from 26% towards 36% as IFS reaches full capacity ramp and new products continue to scale.

Source: Author, with data from our internal financial forecasts.

Combined with other nominal expenses and taxes, Intel is forecasted to generate net income of $18.2 billion by the end of the year, and continue to grow towards $37.2 billion by 2025.

Source: Author, with data from our internal financial forecasts.

i. Base Case Financial Projections:

Source: Author, with data from our internal financial forecasts.

Intel Valuation

Source: Author, with data from our internal valuation analysis.

Drawing on the above analysis on Intel’s five-year growth trajectory, our long-term price target is $77.35. This represents upside potential of more than 41% based on the last traded share price of $54.55 at the time of writing (September 14^th).

Our valuation is derived from a discounted cash flow analysis over a five-year discrete period in conjunction with the base case financial projections for Intel as discussed in earlier sections. A WACC of 7.9% is applied to discount Intel’s projected free cash flows in our valuation analysis, which is consistent with the company’s current risk profile, taking into consideration its current capital structure and ability to maintain robust liquidity. Our valuation analysis also assumes an EV/EBITDA multiple of 5.4x, which is representative of current market expectations based on Intel’s growth prospects.

i. Base Case Valuation Analysis:

Source: Author, with data from our internal valuation analysis.

Over the long-term horizon of beyond five years, we are confident that Intel will catch up to the forward valuation multiple of its peers, which currently exceed 10x. This narrative will be conditional upon materialization of its five-year growth roadmap, which entails regaining product leadership across all of its business segments. Such a scenario would catapult Intel’s intrinsic value to more than $550 billion, bringing it closer to the valuation of current rivals like Nvidia and TSMC.

ii. Sensitivity Analysis:

Source: Author, with data from our internal valuation analysis.

Conclusion

The materialization of Intel’s five-year growth roadmap is expected to catapult its valuation prospects back into the lead. The company’s return to its foundry roots under the new IDM 2.0 business model, combined with an aggressive five-year product portfolio expansion under the leadership of Pat Gelsinger comes at an opportune time as global digital transformation continues to accelerate, underpinning demand over the long run. The U.S. government mandate to boost domestic semiconductor production also makes strong tailwinds for Intel’s new IFS initiative, further bolstering its prospects of regaining technology and production leadership. The next five years will be pivotal for Intel, as it continues to progress towards regaining its former glory as the industry leader.

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.