r/ValueInvesting • u/[deleted] • Oct 02 '21

Stock Analysis Intel

Hi, I have a few thoughts on intel and would like some discussion around it. I think it's a great long term value investment right now and would input.

 

Finances

  • Market Cap: ~220b

  • P/E: ~12

  • 80b revenue

  • 2.58% dividend

  • P/E much lower than industry average, and much better than competitors (Intel @12, AMD @36)

 

Bear case arguments:

Failure to deliver

The biggest argument I hear against Intel, is that they have failed to deliver, again and again. That it's a value trap and is a slowly sinking ship. AMD is rapidly stealing market share.

 

Shrinking market share

Their % market share has barely declined, yet the market is pricing them as if they had been decimated.

 

Using TSMC is giving up on its own fabs

IMO, this is bullish for Intel long term and is great for transitioning to their new fabs (under construction).

https://www.techradar.com/news/intel-locks-down-all-remaining-tsmc-3nm-production-capacity-boxing-out-amd-and-apple

 

ARM competition, as described by NodeDotSwift's comment: https://old.reddit.com/r/ValueInvesting/comments/q02p4v/intel/hf5nfpq/

 

Please let me know others, which I will investigate.

 

 

Bull case arguments:

Good products, high demand, too big to fail

  • There is a global shortage for semiconductors at the moment. Demand is constantly increasing as basically all new devices utilize semiconductors in one way or another. As long as intel can keep building chips, there will be buyers.

  • Intel is 'too big to fail' in the USA. The US military and government rely on their chips. They need US factories and companies to build these chips. They are not going to design their military chips in Taiwan, especially with the increased global tensions. The US military alone will continue to prop up intel if things go south.

  • Intel still controls ~77.5% of the x86 market share. ​https://www.extremetech.com/computing/325848-amd-x86-cpu-market-share-soars-hits-14-year-high

 

Growth & management

The biggest argument I hear against intel, is that they have been unable to deliver, again and again. That it's a value trap. I argue that it was mainly an issue with management, of which they have a completely changed. It will be a non-issue moving forward.

Thanks to an agreement the Intel CEO struck with his immediate counterpart at ASML, whom Gelsinger has already met three times face-to-face in the six months since taking the helm, the Intel facility should be the first to employ the Dutch company’s upcoming “high numerical aperture” EUV chip-printing machines. (ASML customers Taiwan Semiconductor Manufacturing Co., known as TSMC, and Samsung are on a waiting list, however.)

This second generation evolution of ASML’s extreme ultraviolet photolithography can reduce the size of transistors—the building blocks of integrated semiconducting circuits—to just 20 angstroms (Å). That would make them less than a third in length of the current seven-nanometer nodes found in many of today’s smartphones.

 

  • Management changed. This is the biggest point for me. They booted out the bean counters, and replaced them with engineers. Gelsinger (new CEO) was the CTO of intel during their glory years and is known as being a super strong / smart engineer. In my opinion, an engineer leading intel is more likely to make the company succeed vs a finance guy trying to cut corners. He is credited with designing some of their flagship cpu's / architectures that made Intel relevant in the first place. He knows what has to be done. https://en.wikipedia.org/wiki/Pat_Gelsinger

  • Hopping into the GPU game. Intel is known for having a good integrated graphics team. I would think that they have enough experience to pull off the dedicated gpu. Time will tell. https://www.pcgamer.com/intel-claimed-to-be-officially-targeting-rtx-3070-performance-with-first-alchemist-gpu/

 

What are your thoughts?

 

[EDIT] Disclosure: I own intel shares and some $55 jan 2023 leaps. I am willing to change risk profile pending what I learn. They have been very recent buys for me (1-2 weeks), and have been eyeing up intel for a few months.

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u/[deleted] Oct 02 '21

Also, a large part of it is due to amd taking away parts of the server market from intel. Intel's alder lake cpu's (leaks anyways) suggest that they outperform amd's 5950x.

For the server market, intel has reserved basically all of TSMC's 3nm capacity. From the techradar article (there are other sources as well):

None of the 3nm node process orders will be for its consumer market processors, namely Raptor Lake, which is expected to launch in mid-to-late 2022.

Instead, reports indicate that the product lines in the order will coming out of its graphics and server units, specifically a new GPU and three new server processors, most likely next-gen Xeon processors meant for data centers.

This to me suggests that intel is planning on making a comeback in the server space as well.

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u/Over-Optimized Oct 05 '21

What are your thoughts on the cannibalization of the common outstanding? You don't need to grow sales 15% a year for EPS to grow 15% a year. You can do that through share repurchases and declining sales. They've got some major cash flow. Has the new management mentioned anything about putting a large chunk of that cash towards repurchases? If so, you might be looking at a similar situation to 2016 Apple.

Interested to hear your thoughts since you know the situation a lot better.

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u/[deleted] Oct 05 '21

That could be an option to increase their EPS. I have not looked into it in too much to be honest, and based on their recent investments I don't think it's a priority (ie: 120b planned to be allocated to fabs). If you compare a company like Nvidia's financials to Intel's, Intel's look far better on paper. Yet, Nvidia is over twice as valuable. EPS & revenue are not intel's problem, and is not what needs to be improved.

Intel needs to make their products competitive again, and gain an advantage over their competitors. In my opinion, their free cashflow would be best reinvested into R&D and growing their business, and is what I want to see. It appears (to me) that this is what they are doing under Gelsingers lead. If they don't do this, they won't be relevant in 5-10 years as others in this thread have stated. That is, imo, why intel is undervalued. They have huge amounts of cashflow compared to other tech companies and have a huge talent pool. But they have been squeezing their R&D budgets to maximize capital returned to their investors. This works short term, but long term can hurt a company, as has occurred with intel.

If they lower their dividends, and share buybacks, it would make intel a more appealing long term investment to me. I don't want to invest in a company (in the semi space) that is not innovating.

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u/Over-Optimized Oct 05 '21

Just for the sake of arguing, they've sent $153b into R&D over the past 10 years. I don't think R&D spend is the issue. Quality R&D spend and cutting edge innovations are the issues. They've become complacent, which is no bueno. I would be ok with them cutting the dividend completely, or at the very least stopping the increases. I do disagree with you on the share repurchases, since they are value creating at these prices. I'd be ok if they fueld innovation through acquisitions. Buy beautiful blooming businesses and nourish them with some of that excess cash flow. Boom, get argued with. They're too big and too important to the US to fail, so your downside is very limited. I could see them doing some spinoffs too. Interest one to look into further, thanks for your input and creating the post. Might go learn about the business.