Stock Analysis - Intel (INTC)
Welcome to the fourth analysis on stockreview.org. After an extended summer break, it is time to get back into the valuation flow and I am starting it of with a long-term watchlist candidate of mine, Intel.
Before going ahead, let’s get this out of the way (Disclaimer):
The below references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
A short notice before the fundamentals, Intels stock price recently saw a 15-20% drop after announcing better than expected Q2 earnings, but forecasting a significantly slower 3rd quarter and rest of 2020.
Then, when Q3 became basically what management had promised, the stock dropped even further and is now trading in the mid 40s range.
I figured this was the right time to have a look on my side, to find out whether the sudden price drop could create a long-term buying opportunity.
Intels’ business is structured inside two main operating segments. A data-centric and a PC- or Consumer-centric business unit. While best known for its’ legacy processor chip business inside the PC division, it is (of course) the data-centric business unit, which has provided additional growth opportunities in the last years.
With demand for “At-Home” working, learning and other increased necessities, it came as no surprise that in the recent record-breaking 2ndquarter 2020 the Data Center Group and the business unit responsible for Intels memory business were growing by 43% and 76% respectively.
Besides these developments, the stock price tanked after the earnings report on the outlook of a likely postponement of the PC groups transition into 7nm CPUs, which trail behind the companies plans by 6 to 12 months and might adversely affect future revenues for some time to come. This became reality as Q3 revenues fell behind the previous year by 4%.
With a total of 8 points, Intels financial strength is still remarkable. A more than safe dividend, high profitability, low debt and a low current valuation are almost all you want in an established company.
The only category falling behind is unfortunately the growth section, with both Sales and Cash Flow only showing minor increases in recent years, while at the same time some of the main competitors are increasing their revenues like never before.
While the past development doesn’t necessarily indicate a bad future development, it certainly pays tribute to the stagnating chip business, where the fight for market share is fiercer than ever.
The result of the Five-Forces Analysis exemplifies the struggles Intel is facing at the moment. With a perfectly average score of 10 and flat 2 points throughout all categories, the company shows no significant weaknesses but also lacks competitive advantages in one of the fields. While gross margins have been decreasing in the past years, this is an issue for the industry as a whole and not a lack of pricing power on Intels side. Further it can partly be mitigated by forwarding cost reductions on supplier side. New entrants can be held at bay until they will reach a reasonable size and while industry competition has once again been increasing as of late (thanks to a resurgence of AMD), it should be nothing that Intel can not handle.
Intels business is fairly scalable as far as the legacy chip business is concerned. While this would already be sufficient for an average score, the growing data-centric division has it (theoretically) even easier to acquire new customers and ramp up revenues going forward.
Further, besides its existing and self developed intellectual properties, Intel is regularly active on M&A side as well. A push inside the mobility space saw it acquiring Israeli Tech-Company Mobileye for $15b in 2017 (now inside the data division) and most recently MaaS (Mobility-as-a-Service) Startup Moovit for several $100m.
Therefore a score of 4 also in the “intangibles” section can be reasoned for I believe. While some of these acquisitions might as well lead to further network effects in the future, for now 3 points are the limit here. Total score in this section is 11 points.
Having a market cap of about $200b already, Intel is definitely (still) one of the bigger companies in the “semiconductor” sector. But other companies like AMD or Nvidia are once again catching up or have overtaken INTC in terms of pure market value. This once again underlines the competitiveness of the industry as a whole, but also leads to a dilemma for my valuation.
While the inflated P/E and P/S ratios on other companies might actually be warranted, applying them on Intels current key figures, would indicate a potential upside of 100% and more. At the same time, growth prospects (even from Intels own management) seem rather bleak and for the time being can not compete with the 40-50% revenue increases, Nvidia is currently reporting.
I am therefore not including any multiple valuation in the final analysis result.
From Discounted Cash Flow standpoint, Intel has a lot going for itself. Whether considering a (reasonable) low single digit growth or even completely flat continuous cash flows within the forecasting horizon, results come up ahead of the current market value. Only exception is the pessimistic development case, which considers a 20% drop from current levels and further, slightly shrinking Cash Flows. Yet, even in this scenario, the final estimated equity value is not too far from the current market cap. That being said, an overall average valuation of about $250b based on the current fundamentals suggests the stock is currently undervalued by about 20-30%.
“So why the low price? What is the issue?” you might ask. Recent comments by the management team regarding the delay of transition into 10th generation of processing chips had created uncertainty for many investors. Further bad news in the recent weeks and months include the announcement by Apple Inc. to silicon based in-house chips for its Mac line as well as $40b acquisition of chipmaker Arm by Nvidia, which was announced just a few weeks ago. As arguably the best performing chipmaker in the past few months (maybe even years), Nvidia had always needed to approach its competitors when in need of a chip in one of its GPUs.
Further, while Intel and AMD currently still hold more of a duopoly inside the PC CPU space, more suppliers are pushing into the space and also the high-end data center CPU sector, currently might be at risk of further competition for Intel.
To make things worse, just a few weeks after Nvidia’s above mentioned announcement, also AMD reported a high profile acquisition with the $35b takeover of competitor Xilinx.
How the above will affect Intels business opportunities going forward still remains to be seen, but the road ahead is certainly a bumpy one.
As always, please consider these risks as well before taking any position!
That concludes the our first review after the summer break.
What are everyone’s thoughts on the chip industry? Will Nvidia continue its run and break into further markets? Will Intel lose additional market share to AMD in the coming years?
Let me know in the comments!
Disclaimer: I am not invested in INTC.