As one of the largest semiconductor manufacturers in the world, Intel Corp. (INTC, Financial), with a history dating back to the 1960s, has had its share of up and down markets and operating problems. Today’s problems include not just normal chip cycles, but there are also market share losses to competitors such as Advanced Micro Devices Inc. (AMD, Financial).
Intel designs, manufactures and markets semiconductors and other computer-related products and technologies on a global basis. The company’s segments include Client Computing Group (CCG), Data Center and AI Group (DCAI), Network and Edge Group (NEX) and emerging segments such as Mobileye, Intel Foundry Services (IFS) and AXG.
Key products include central processing units, chipsets, system-on-chip and multichip packages as well as non-platform or adjacent products, including accelerators, boards and systems, connectivity products, graphics and memory and storage products.
The company also provides high-performance computing solutions for embedded applications in the retail, industrial and health care markets. In addition, Intel provides solutions for assisted and autonomous driving technology platforms as well as computer vision and machine learning-based sensing, mapping and localization, driving policy and active sensors. It also supports the cloud markets through workload-optimized platforms and related products. The company serves original equipment manufacturers, original design manufacturers and cloud service providers.
Intel currently has a market capitalization of $181 billion and generated $79 billion in revenue last year.
Underperformance
Intel has generally underperformed its competitors in recent years, ceding market share for various products to companies such as AMD and Nvidia Corp. (NVDA, Financial). The company's stock has also underperformed these peers with a 22% 12-month decline compared to positive double-digit gains for AMD and Nvidia. Operational delays and product issues explain much of the underperformance.
Financial
Intel reported disappointing first-quarter financial results on April 28, with revenue declining 7% and the gross margin falling to 50.4% from 55.2% in the prior-year period. The Client Computing Group segment was the most significant drag on growth, which showed a revenue decline of 13% partially due to the ramp down of the Apple Inc. (AAPL, Financial) business. The other smaller units all showed strong double-digit revenue growth.
The company maintains a safe balance sheet with a net cash position of $7.5 billion. Total cash and investments at quarter's end were $44.7 billion and total debt balances were $37.2 billion.
Intel spends massive amounts on research and development, which should give it a competitive advantage over peers in the long term. Over the past three years, the company has spent $13.4 billion, $13.5 billion and $15.2 billion on research and development. 2021 R&D spending alone was roughly equivable to the entire revenue base of AMD. In addition, Intel has the cash flow to invest heavily in capital expenditures at its facilities, which has averaged more than $16 billion over the past three years.
Valuation
The company’s guidance for 2022 include revenue of $76 billion, a non-GAAP gross margin of 52%, and non-GAAP earnings per share of $3.60.
Analysts' earnings per share estimates are all over the place, ranging from a low $3 to a high of $3.70. Using company guidance, the company is selling at approximately 12 times current year earnings. The company’s enterprise value/Ebitda ratio based on 2022 estimates is roughly 6.
The GuruFocus discounted cash flow calculator using 2022 depressed earnings of $3.60 as the starting point and a 5% 10-year growth rate provides of value of $54, or roughly 18% above today's price.
Guru trades
Gurus who have purchased Intel stock recently include Ray Dalio (Trades, Portfolio) and Richard Pzena (Trades, Portfolio). Investors who sold or reduced positions in Intel include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Chris Davis (Trades, Portfolio).
Conclusion
Intel appears to be going through some short-term difficulties, but they are likely creating an undervalued situation for the stock. The massive spending on R&D should pay off over time and is a strong competitive advantage. The company’s above-average dividend yield of 3.3% should provide stability until earnings recover and Intel outperforms its peers.
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