Intel has been under the spot light for the majority of 2022 and the last couple of months in 2021, but for all the wrong reasons. The company has become quite hated in the market and is selling off tremendously and can’t quite seem to find a bottom. The share price has lost 50% YTD, and is down 60% from its high of 68$ achieved in April of 2021.
The issues started with their announcement of a very generous capital expenditure program of up to 25 Billion Dollars yearly for the next few years.
Intel Corporation engages in the design, manufacture, and sale of computer products and technologies worldwide. It mainly designs and manufacturers CPUs (Central Processing Units) for personal computers and data centers.
In 1990 almost 40% of the world’s semiconductors were produced in the U.S. Today, 80% of chip production occurs in Asia; only 12% are made in the U.S., half of which comes from Intel. Most of the semiconductor makers have taken advantage of the weak labor in Asia and have been only designing their chips (CPUs & GPUs) while leaving the actual production abroad, mostly in Taiwan, with the exception of Intel who fell behind and still makes its own chips in their factories in USA, Europe & Asia. While this has been a huge headwind for Intel over the past decade and has caused them to fall behind their competition in the last 2 decades it could prove to be a tailwind going forward.
Intel has been losing market share to AMD in CPU for the last decade, and has almost no presence in the lucrative discrete Graphic cards market which is split between NVDA 83% and AMD 17%, although Intel commands a 62% of Integrated GPU market which account for 76% of all GPU sales.
As the name suggests, integrated graphics means that the GPU is integrated onto the CPU die and shares memory with the processor. Discrete chips are contained on their own card and come equipped with their own memory, called video memory or VRAM, leaving your system RAM untouched. Until recently Discrete GPUs didn’t exist, but with the evolution of gaming capabilities it has emerged as a necessity for gaming computers, and has also found a huge market in crypto mining.
Intel has since Feb 2021 appointed a new CEO who has promised to turn the company future, announced major expenditure programs aiming at regaining its market share, announced the building of new factories in the US & Europe, of which some will be foundries (factories to produce chips for other designers not just their own, taking an aim at TSMC), and have launched their own discrete GPU.
Intel has been growing its revenue at an annual rate of 5% over the past 10 years, while this growth is very low compared to its peers AMD & NVDA who have seen 10 year growth rates of 15 & 20% respectively, but if you exclude the last 3 years, you will find their (AMD & NVDA) growth rate drops to a more modest 6 & 10% while Intel’s growth remains in the 5%. Still you can argue that at this growth rate, Intel is not worth the investment, but if you consider its low valuation compared to both AMD &NVDA which both trade at over 4 & 5 times the PE ratio of Intel, not to mention Intel trades at historically low Price to Book ratio, unlike AMD & NVDA who are currently trading at very high PB ratios compared to their own historical averages.
Moreover, INTC is trading at a discount to its Intrinsic Value obtained by DCF (Discounted Cash Flow) model assuming an 8% growth going forward and a 12% discount rate, whereas NVDA would be overvalued on a DCF model even with expected growth rate of 20% annually, same applies to AMD.
It is also my belief that going forward, Intel is more likely to generate a better annual growth for a few reasons, it is expanding its business with more factories, more products, and the foundry business, It is the only major player in the industry that doesn’t rely majorly on production in China or Taiwan so more immune to the coming geopolitical tension, it will benefit much from the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022), and most importantly unlike AMD & NVDA it didn’t benefit much from the stimulus packages and the increased sales over the past 2 years due to gaming and Crypto mining which I think will cool down tremendously in the coming years and so the growth rate will be much more achievable due to the prior realistic growth.
Furthermore, Intel has a sound balance sheet with cash & cash equivalents exceeding its total debt, the company is cash flow positive and can cover its entire debt with 2 years of its 5 year average cash flow not considering the cash on hand now. Intel has been steadily buying back its shares at a 3% annual rate for the last few years, giving investors a bigger piece of the pie. Intel currently pays around 5% annual dividend to investors and is trading at the same price it traded between 2014 & 2016 while book value per share has easily doubled from those years. Intel is a leader in the semiconductor sector which is expected to continue growing for the next few years with applications in AI, EV, Cloud Computing, etc.
Finally, it’s worth mentioning that investing in Intel won’t be an easy ride, share price might drop more from here, while I don’t expect a significant down side, if the company continues reporting bad results in the coming quarters, which is quite expected due to the capital expenditures and the tight monetary environment, but it is mostly priced in.
My advice would be to DCA (dollar cost average) into a position and plan on building it over the next few months to a year as long as the share price is between 25 & 35$, this way we are safe guarding our portfolio from any further drop in price and we could add more if it does, limit the position to no more than 15% of overall portfolio since this investment will take a few years to bear fruits, and sit and enjoy the dividends until the market realizes it is making a tremendous mistake in discounting Intel, luckily for us.
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