Intel Inside…. Stock Analysis of Intel Corporation!
Let’s Discuss What Intel is All About:
Intel Corporation (Intel) is an American multinational corporation and a Silicon Valley giant which has been the world’s largest chipmaker since the beginning of times. Intel designs and manufactures micro-processors for the global personal computer and data center markets. Intel pioneered the x86 architecture for microprocessors.
Although the personal computer market has declined over the years however the Company’s processor business has benefitted from shift to the cloud and the corporation has also been expanding into new fields such as the Internet of Things, Artificial Intelligence and self driven automotive technology to diversify its business away from its core personal computing base.
Stock Performance:
Intel’s stock was once considered a stable tech investment that generated reliable returns for its stockholders through share buy backs and dividends as the Company generated robust cash flows YoY as a result of positioning itself as the world’s largest manufacturer of x86 CPUs for PCs and data centers.
Fast forward to 2020 and the stock has had an uneasy ride to say the least. While the stock markets have been registering record peaks aided by money printing and Government supported stimulus funding, Intel has suffered an approximate YTD loss of 15%.
So What’s Putting the Stock under Pressure in a Red Hot Marketplace… Its Recent Competitive Headwinds:
The stock has faced recent headwinds with reports emerging in Dec 2020 that Microsoft is designing its own processors for its servers and surface PCs. This news came on the back of reports that other long term customers of Intel including tech giants such as Apple, Alphabet and Amazon were shifting to internally developed custom made computer chips to achieve enhanced performance and better integration with their software and devices. Alphabet, Amazon, and Microsoft are developing internal custom built chips that are expected to be better at artificial intelligence, while Apple’s chips is designed to improve the performance and application of Apple devices.
Making processing chips can be categorize as a commodity oriented business in the traditional sense where potentially anyone can enter the market to replicate and advance the technology. We have seen this with the rise of new age chip makers that have challenged Intel in the form of Advanced Micro Devices (AMD)and the emergence of contract based chip makers such as Taiwan Semiconductor Manufacturing.
To further highlight the relative competitive nature of the business, tech customers several times the size of Intel in terms of market capitalization and carrying significant financial weight have started working on designing bespoke chips in house. These companies can eventually deploy large scale contract chip makers such as Taiwan Semiconductor Manufacturing to complete the task of actual development of the chips. The loss of business has to date been moderate for Intel however the growing trend of customers focusing on internally developed processing ability as a form of cost saving (and importantly differentiation) has meant that Intel Investors are increasingly feeling jittery . There appear to be multiple manufacturing and competitive concerns surrounding Intel and the Company is expected to announce its plans to outsource some of its manufacturing during the next earnings announcement in January 2021. Thus, Intel management has a task of coming up with a turnaround plan that resurrects the business profile of the Company amidst these competitive headwinds. The Company’s management has talked about changing their business orientation to focus on 30% of the total Semi-conductor market rather than maintaining its stranglehold on 90% of the Central Processing Unit market . The Company also needs to continue to rebalance and selling off its non core assets.
What do the fundamentals tell Us:
This is where matters get really interesting; INTEL has reported TTM Revenues of US$ 78.09 MM with a still healthy Net Profit of US$ 21.94 MM resulting in a Net Profit Margin of 28.10% as of Sep 2020. The resulting EPS comes to circa US$ 5.16 per share with a strong Free Cash Flow per share of US$ 3.71 per share. The Company’s balance sheet profile has remained acceptable as of Sep 2020 whereby Total Assets of US$ 145.2 Bn were financed by Equity of US$ 74.5 Bn resulting in a Leverage (Liability/ Equity) ratio of 0.95x and a Gearing Ratio (Debt/Equity) of 0.48x. The Company has a Debt to Free Cash flow of 3.55 times meaning it can repay its debt within 3.55 years from its operating Free Cash Flow.
From a long term historical performance perspective, Intel’s Sales have grown from US$ 43.6 Bn in 2010 to US$ 78.09 Bn in (TTM) Sep 2020 registering 10 year CAGR of 6.68% whereas over the past 5 years the sales CAGR comes to 8.99%. Company’s Earnings have recorded a mixed performance over the past decade and even declined to US$ 9.6 Bn in 2017 however they have since recovered to US$ 21.9 Bn as of Sep 2020 (TTM basis) registering a CAGR of 17.74% over the past 5 years.
On the valuation front, the Company is currently trading at a P/E of 9.15x and a P/S ratio of 2.56x. As shown in the table below, these ratios compare favorably with the Company’s average 5 years pricing fundamentals whereby the 5 year P/E for Intel averages at 14.19x and average P/S comes to 3.26x. To take things into perspective, Intel’s main rival AMD is valued at a P/S ratio of 12.66 times and a P/E ratio of 123.72 times. The table below provides a summary of relative valuation parameters.
As can be seen from the relative pricing metrics comparison, the competitive pressures faced by Intel seem to be already priced into the current stock price of US$ 46.5 as of 23rd Dec 2020. Further supporting its fundamental footprint is the Company’s stable Cash Flow Generation, Dividend Profile and regular Share Buy Backs! Admittedly, the Company is facing challenges and there is always the risk of falling to the value trap fallacy when looking at favorable price multiples however given the company’s innovative history and market control, management needs to come up with a strategic turnaround plan that indicates the company’s future focus and strategic direction to pacify investor fears however given the company’s solid historical financial performance record, acceptable balance sheet profile and manageable debt levels at 3.55 times of Free Cash Flow, the stock has the potential to post a turnaround from these levels if investors are willing to exhibit patience with this silicon valley giant with consistent cashflow and financial performance to its credit….
