Intel has been talked about a lot in recent discussions in the value world. What once was an overpriced tech stock now looks like a company with a very strong moat at a cheap valuation. Before getting into valuation let us discuss Intel’s strong moat.
Here is a brief summary about the company:
Intel Corporation, one of the world's largest semiconductor chip maker, supplies the computing and communications industries with chips, boards, and systems building blocks that are integral to computers, servers, and networking and communications products. Intel has a market cap of $107.52 billion; it is currently trading around $19.31 with a P/E ratio of 11.6 and P/S ratio of 3. The dividend yield of Intel Corp. is 3.3%. Intel Corp. had an annual average earnings growth of 2.5% over the past 10 years.
Intel’s largest and only serious competitor is Advanced Micro Devices (AMD, Financial). Even though both companies make similar chips which would make them somewhat similar to a commodity type business, Intel has a huge cost advantage over AMD.
As mentioned above Intel and AMD make similar products. They are not exactly the same product but they provide the same service. If both companies make chips that are around the same quality, and cost the same then Intel will retain the current market share that it demands. Intel had revenue last year of $35 billion while AMD had revenue of $5 billion. Intel is around seven times as large as AMD. Therefore this allows Intel to invest more in research and take over even more of a market share.
Let us demonstrate:
Assuming each company invests 10% of revenue in R&D then Intel will be spending $3.5 billion a year on R&D, while AMD will only be spending $500 million. This gives Intel a enormous edge in moving ahead of AMD in terms of technology development, and gaining a larger proportion of market share. To demonstrate what has actually happened Intel between 1988-1990 spent twice as much on R&D as AMD, but only 2/3 as much as AMDS as a percentage of revenue.
If AMD wants to match Intel’s spending on R&D it would have to spend an outrageous 70% of its revenue just on R&D this is clearly next to impossible. So year after year Intel can keep stealing market share from AMD and there is little the AMD can do to respond.
It is not surprising therefore that Intel’s return on invested capital (ROIC) has averaged 14.7% over the past five years, while AMD’s ROIC over the past five years was -19.5% per annum. High ROIC is usually an indicator of a moat.
It is clear that Intel dominates its niche with a moat, in the next article I will discuss valuations and some gurus who own the stock.
Disclosure: No position
http://www.valuewalk.com/
Here is a brief summary about the company:
Intel Corporation, one of the world's largest semiconductor chip maker, supplies the computing and communications industries with chips, boards, and systems building blocks that are integral to computers, servers, and networking and communications products. Intel has a market cap of $107.52 billion; it is currently trading around $19.31 with a P/E ratio of 11.6 and P/S ratio of 3. The dividend yield of Intel Corp. is 3.3%. Intel Corp. had an annual average earnings growth of 2.5% over the past 10 years.
Intel’s largest and only serious competitor is Advanced Micro Devices (AMD, Financial). Even though both companies make similar chips which would make them somewhat similar to a commodity type business, Intel has a huge cost advantage over AMD.
As mentioned above Intel and AMD make similar products. They are not exactly the same product but they provide the same service. If both companies make chips that are around the same quality, and cost the same then Intel will retain the current market share that it demands. Intel had revenue last year of $35 billion while AMD had revenue of $5 billion. Intel is around seven times as large as AMD. Therefore this allows Intel to invest more in research and take over even more of a market share.
Let us demonstrate:
Assuming each company invests 10% of revenue in R&D then Intel will be spending $3.5 billion a year on R&D, while AMD will only be spending $500 million. This gives Intel a enormous edge in moving ahead of AMD in terms of technology development, and gaining a larger proportion of market share. To demonstrate what has actually happened Intel between 1988-1990 spent twice as much on R&D as AMD, but only 2/3 as much as AMDS as a percentage of revenue.
If AMD wants to match Intel’s spending on R&D it would have to spend an outrageous 70% of its revenue just on R&D this is clearly next to impossible. So year after year Intel can keep stealing market share from AMD and there is little the AMD can do to respond.
It is not surprising therefore that Intel’s return on invested capital (ROIC) has averaged 14.7% over the past five years, while AMD’s ROIC over the past five years was -19.5% per annum. High ROIC is usually an indicator of a moat.
It is clear that Intel dominates its niche with a moat, in the next article I will discuss valuations and some gurus who own the stock.
Disclosure: No position
http://www.valuewalk.com/
