Is Intel Ready to Not Suck?

There was a time when ‘Intel Inside’ meant quality. Today, it means you’ve got a second-hand PC.

Intel fell way behind the competition in the last 15 years as its semiconductor designs took longer to create and produce.

While competitors like Nvidia (NVDA), Advanced Micro Devices (AMD), and Taiwan Semiconductor (TSM) saw share prices explode over the same time period, Intel’s shares are about where they were a decade ago.

The company hopes a recent realignment will help them turn things around.

And maybe it will. After all, financial pros started looking into the company more heavily as headlines of its restructuring and investment crossed the screen.

But is it just lipstick on a pig?

Intel’s Business

Intel is one of the few vertically integrated semiconductor companies. It does everything from chip design to manufacturing (foundry), similar to TSM.

The recent realignment breaks the business into the following segments:

• Client Computing Group (50% of sales): Provides platforms for end-user form factors, focusing on 2-in-1, thin-and-light, commercial and gaming segments and adjacent areas like WiFi and Thunderbolt.
• Data Center and AI (31% of sales): Offers workload-optimized platforms for enterprise, cloud, communications infrastructure, and technical computing.
• Network and Edge (13% of sales): Provides network infrastructure platforms for network function virtualization (NFV), edge computing, and wireless access base stations.
• Mobileye (3% of sales): Offers computer vision and machine learning-based solutions for sensing, mapping, localization, driving policy, active sensors, SDKs, cloud support, data services, smart mobility, customer support, and system integration.
• Intel Foundry Services (1% of sales): Intel’s semiconductor manufacturing with differentiated process technologies for external customers.
• All Other (2% of sales):  Includes results from non-reportable segments like IOTG, NSG, PSG, and revenue from other unallocated adjustments.

CCG not only accounts for half of Intel’s sales, it’s essentially their ENTIRE profit driver:

Source: INTC Q1 Earnings Presentation

Intel faces stiff competition from TSM in the IFS segment to NVDA and AMD in the CCG. And it’s still plagued by constant delays in the design and development of its newest chips.

Financials

Source: Stock Analysis

Sales declines created a major shortfall as $20-$30 billion in annual operating cash flow has dwindled to just $7.7 billion in the last 12 months, while Capex has increased from $16.2 billion in 2019 to $27.9 billion in the last 12 months.

Meanwhile long-term debt ballooned from $25.3 billion to $48.8 billion over the last three years. However, net debt only rose from $15.5 billion to $21.3 billion, as cash on the balance sheet grew.

Nonetheless, with demand softening, many question the logic of continuing to pay out a healthy dividend rather than using the cash to improve operations.

Valuation

Source: Seeking Alpha

Intel’s the cheapest of its peers except for TSM, and they have a sizable geopolitical discount baked into their price.

Notably, Intel trades at 17.1x trailing cash which is expected to worsen to 28.6x next year.

Its peers may be more expensive, but they exhibit growth that isn’t even in the same ballpark.

Growth

Source: Seeking Alpha

Every one of Intel’s peers saw substantial revenue growth over the past several years, while Intel saw declines during the same period.

Most saw fantastic EBTIDA and earnings growth, though AMD notably struggled on the EPS growth front.

Still, every other company delivered fantastic free-cash-flow growth.

Profitability

Source: Seeking Alpha

Intel’s margins are the worst of the group, dragged down by several of its unprofitable units and foundry business.

However, if they succeed in their turnaround, the foundry side (IFS) could produce $60 billion in revenue by 2032.

Our Opinion 8/10

Intel has a long road ahead of them and a history of poor execution.

However, we like the plans in place, and the stock is down almost 40% from its 2022 highs.

The risk/reward here is compelling.

Treat Intel more like a speculative stock with a decent dividend using a small position size.

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