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Has Intel Finally Found its Footing?
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Intel (INTC) once dominated the semiconductor industry. Slapping an Intel Inside sticker on a PC immediately conferred a high quality standard. 20 years later, the company now sits at the bottom of the innovation barrel, plagued by missteps that put it far behind its competitors. Now, the company is pivoting once again, entering the foundry (processor manufacturing) business , attempting to directly compete with a slew of Chinese companies and the dominant Taiwan Semiconductor (TSM). YoY revenue growth for Intel’s Foundry Services (IFS) shot up an impressive 300% last quarter – a number that caused financial pros to start researching the stock rapidly. But is that enough to turn this company around? Intel’s Business Covid exposed the global semiconductor supply chain’s fragility. America, realizing it’s dependence on China and overseas manufacturers, decided to plow billions into local foundries, bringing chip production back home. Intel committed $20 billion to build two new fabrication plants in Arizona as well as a similar amount for facilities in Ohio. While IFS isn’t yet profitable, the revenue growth is eye-popping.
Source: Intel Q3 2023 Investor Relations As of right now, that’s just a small part of the overall business, but one of the fastest growing. Intel’s broader business can be broken down into the following areas:
Financials
Source: Stock Analysis Investors have been concerned, and rightly so, that Intel’s fallen far behind its competitors. Although the company generates billions in cash from operations, its latest investments turned free cash flow negative. To give you an idea, operating cash flow in 2018 and 2019 was $29.4 billion and $33.1 billion, respectively. That plunged to $15.4 billion in 2022 and is $14.6 billion over the rolling 12-month period. At the same time, Capex went from $15.2 billion and $16.2 billion to $25.1 and 25.0 billion for those same timeframes as revenues plummeted. Intel’s Client Computing Group struggled to keep up with the latest innovations from Advanced Micro Devices (AMD), which continues to take market share. That forced Intel to increase long-term debt from $25.3 billion in 2019 to $35.7 billion in the latest filing. All this is to say, Intel’s making a big bet that will either pay off or obliterate shareholder value. Valuation
Source: Seeking Alpha Intel’s profitability is non-existent. So, we’re left to judge it by price-to-cash flow and other measures. Certainly, it’s cheap, as is ON Semiconductor (ON). However, we’d argue that it may not be cheap enough given its negative free cash flow. Growth
Source: Seeking Alpha As the table above shows, Intel’s revenue growth has been abysmal, worse than any of its peers. At a time when demand for semiconductors is at an all-time high, Intel is unable to capitalize. The negative EBITDA growth over the last several years further evidences this. Profitability
Source: Seeking Alpha On top of growth problems, Intel’s margins aren’t great. However, those should improve as the new plants come online in 2025. Until then, it’s going to be a slog. Our Opinion 5/10 Intel’s transformation is very much up in the air and many years overdue. We’d hesitate to put money into the company until we see progress towards the end state. Otherwise, it’s dumping money into a giant question mark. |
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