INTC – Government To The Rescue

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Last month President Biden signed a $280 billion CHIPS Act. The bill is meant to boost domestic chip manufacturing. One of the bill’s beneficiaries will be Intel (INTC). The company is building two factories in Arizona and at least two more in Ohio. 

Intel has struggled for years since losing its dominance to AMD. The company bet big on its innovation that flopped.

While it enters the top five semiconductor stock searches by financial pros, that’s more a function of its popularity as an index holding.

But with shares down nearly 40% YTD, is now a good time to get into INTC?

Check out our analysis below…

Intel’s Business 

Intel (INTC) designs, manufactures and sells computer products and technologies. The firm breaks its business down into the following segments: Client Computing Group, Datacenter and AI Group (DCAI), Network and Edge Group (NEX), Accelerated Computing Systems and Graphics Group (AXG), Intel Foundry Services (IFS), and Mobileye (MBLY). 

Its Client Computing Group creates platforms for end-user form factors, focusing on 2-in-1, thin-and-light, commercial and gaming, and connectivity. 

The Datacenter and AI Group develops data center products and helps businesses with their artificial intelligence strategy. 

Its Network and Edge Group achieved record revenue in Q2 2022, thanks to its infrastructure processing unit, Mount Evans, which is a joint design project between Google and Intel for Google’s cloud infrastructure. 

The firm’s Accelerated Computing Systems and Graphics Group is chartered with developing high-performance computing and graphics solutions across client, enterprise and data centers. 

Intel Foundry Services is a fully vertical, standalone foundry business that offers manufacturing services, including its industry-leading sort and test capabilities. 

Lastly, the Mobileye segment focuses on developing technology for autonomous driving. 

AMD focuses solely on design, outsourcing its manufacturing to other companies. Intel, like Taiwan Semiconductor (TSM), designs and manufactures its processors.

This has its advantages, especially when supplies are tight, like right now. But, it can hamper innovation, as Intel experienced over the last decade.

Financials

From 2016 to 2021, Intel grew its revenues from $59.3 million to a record $79 million, representing an increase of 33%. 

However, in Q2 2022, the company announced that its revenues are expected to be significantly lower in 2022, at approximately $65-68 million. Revenue declined 22% year-over-year, as fewer people are buying PCs. It was the first quarterly loss for the firm in over a decade.

Despite the drop in revenue, the firm is in a strong financial position. Its current ratio of 1.9x indicates it has plenty of liquid assets to cover its short-term liabilities. Furthermore, the company offers an attractive annual dividend of $1.46 per share. That’s on top of $2.38 free cash flow per share (cash after CAPEX).

Valuation

Shares of INTC are down nearly 40% YTD.

On the bright side, the stock is incredibly cheap from a valuation perspective. It trades at P/E GAAP of 6.7x, notably less than its 5-year average of 12.9x. 

In fact, it’s P/E ratio is lower than competitors Advanced Micro Devices (AMD) at 35.3x, Qualcomm (QCOM) at 11.3x, Nvidia(NVDA) at 44.5x, and Tawain Semiconductors (TSM) at 16x. 

Moreover, INTC has a price-to-sales ratio of 1.93x, notably lower than its 5-year average of 3.1x. Its competitors have a price-to-sales ratio of NVDA at 11.4x, AMD at 5x, QCOM at 3.4x, and TSM at 6.5x. 

As we noted earlier, Intel’s dividend yield of 4.62% is significantly higher than its 5-year average of 2.54%. Its price-to-cash flow ratio of 5.6x is more attractive than its competitors, AMD at 34.9x, QCOM at 16.5x, NVDA at 44.9x, and TSM at 8.6x. 

Profitability

INTC has a lower gross profit margin than its competitors at 49.8%, while AMD sits at 50.7%, QCOM at 57.9%, NVDA at 60.4%, and TSM at 54.9%. It’s interesting to see such a wide gap between INTC and TSM, given the similarity of their businesses.

However, INTC has a competitive EBITDA margin of 34.5%, better than AMD at 26.1%, and not that far off from NVDA at 35.9%, and QCOM at 39.8%. INTC is a cash cow. 

Plus, it generates $22.5 billion in cash from its operations, far superior to AMD at $3.7 billion, QCOM at $8.7 billion, and NVDA at $7.5 billion. 

Growth

INTC expects its revenue growth to be negative in 2022, which is not good when its competitors are still growing significantly. 

Additionally, the company’s revenue growth (YoY) is negative. Meanwhile, AMD is at 61.7%, QCOM at 29.3%, NVDA at 35.8%, and TSM at 29.3%. 

Consequently, INTC has announced several organizational changes in an attempt to spur back growth.   

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Our Opinion 8/10

If you invested in INTC three years ago, you’d be down nearly 27%. 

Shares are now trading near 2017 levels. 

However, we believe this has created a buying opportunity. The company is making several changes to address the business climate. It made Patrick Gelsinger the CEO last year, who is now leading the charge. 

While we don’t expect shares to bounce back right away, we think that this stock has a chance to outperform the overall market over the next few years. 

Plus, It offers an attractive dividend that can be reinvested to improve returns. And it has plenty of cash to weather its current difficulties. Government support is also a boon during tough times.