The CEO is the person who usually knows the most about the company they are running. A good CEO usually works around the clock and gets access to financial data directly from the chief financial officer and other company insiders and market experts that is not available to the public. Their goal is to look forward and plot the trajectory of the entire company.
CEOs will of course be positive about their company during interviews with news outlets. However, actions speak louder than words, and if you want to tell whether a CEO is truly bullish on the business, the best proxy (though not 100% accurate) is to look at whether they have been buying thier company's shares.
Thus, in this article, we will go over two stocks CEOs have been buying that I believe have seen their share prices unfairly butchered. I discovered these stocks by using the GuruFocus CEO buying screener, where I screened for companies with over a $1 billion market capitalization that are in the technology sector.
1. Intel
Global semiconductor designer Intel (INTC, Financial) got a new CEO, Patrick Gelsinger. in February 2021. Gelsinger was a former employee of Intel who has come back to help turn around and refocus Intel after the company fell behind with their 7nm chip releases. The CEO outlined bold plans to double down on returning to manufacturing by investing $20 billion in two new chip factories in Arizona. The company is expected to benefit from tailwinds such as the U.S. CHIPs Act, which is providing over $50 billion of incentives for semiconductor research and $39 billion in manufacturing incentives to the industry.
Gelsinger wants to bring back the “old Intel” business model, which focuses on execution and operating discipline. Wall Street is skeptical of his plans, but he does have both industry and government funding tailwinds. Fortune Business Insights forecasts the global semiconductor industry to grow at a rapid 12.2% compounded annual growth rate through 2029. This growth rate is expected to expand the industry value from $573 billion in 2022 to a staggering $1.3 trillion by 2029.
CEO buying
It was great to see the CEO putting his money where his mouth is as he purchased 14,800 shares at an average price of ~$34 per share in the second quarter of 2022. At the time of writing, the stock is trading ~27% cheaper than this buy price.
Intel’s stock price has been butchered by ~64% from its highs in April 2021. The company recently announced a slowdown in PC demand and possible layoffs as the spike in PC demand from the beginning of the pandemic cools down and reverses.
Financials
In the third quarter of 2022, Intel announced $15.32 billion in revenue, which declined by 20% year over year but surprisingly beat analyst estimates by $29.9 million. The revenue decline was driven by production issues and lower demand.
Intel reported earnings per share of $0.25, which beat analyst estimates by $0.12. This was a stark improvement from the second quarter of 2022, in which earnings per share was $0.11, which missed analyst estimates by $0.64.
Third-quarter results were partially offset by “restructuring charges” of $664 million, as the company rolls out a series of cost reduction actions. Intel announced a staggering $10 billion in cost reductions to be implemented through 2025. The company said it planned to list Mobileye (MBLY, Financial) on the Nasdaq stock exchange as it aims to improve its efficiency and focus on its core business.
In July 2022, the U.S. Congress passed the CHIPS Act, which aims to boost semiconductor manufacturing in the U.S. as a way to improve supply chains and reduce reliance on China. Intel is expected to benefit directly from the $52 billion in subsidies on offer as the company plans to open a new chip manufacturing plant in Ohio.
Intel has a solid balance sheet with $27 billion in cash and short term investments. The company does have high debt of $35.4 billion, but just $2.8 billion of this is current debt due within the next two years.
Valuation
Intel is trading at a forward price-earnings ratio of 11.2, which is 7% cheaper than its five-year average. The company is also trading at a price-to-free-cash-flow ratio of 5, which is 33% cheaper than its five-year average. Deep value investors might be attracted to Intel as it trades at a price-book ratio of 1, which is 62% cheaper than its five-year year average.
Relative to other semiconductor companies such as Taiwan Semiconductor Manufacturing (TSM, Financial), Advanced Micro Devices (AMD, Financial) and Nvidia, (NVDA, Financial), Intel is trading very cheaply.
The GF Value chart indicates a fair value of $49 per share for the stock, making it “significantly undervalued” at current levels. However, I think it's possible Intel could be a value trap as its fundamentals are still declining. The semiconductor industry is all about innovation, and Intel has spent a worrying number of years falling behind, which investors shouldn't ignore.
2. Asana
Asana (ASAN, Financial) is a leading software platform that is used by enterprises for work management. The company boasts a plethora of elite clients which include Alphabet's (GOOG, Financial)(GOOGL, Financial), Meta (META, Financial), Uber (UBER, Financial), Spotify (SPOT, Financial), Deloitte and many more.
Asana was founded by silicon valley legend Dustin Moskovitz. Moskovitz was one of the co-founders of Facebook along with Mark Zuckerberg, and he reportedly invented the iconic “like button." Moskovitz founded Asana in 2008 and used his connections to build up the business's solid customer base. Investing into founder led companies is a key tenet of my investment strategy as they tend to have “skin in the game” and a greater vision for the company. In this case, the founder owns a staggering 49% of the company.
CEO buying
Moskovitz purchased a further 19.3 million shares of Asana in September 2022. On the day of the trade, shares traded for an average price of $18, which is slightly less than the ~$22 share price at the time of writing. Despite this increase, Asana’s share price is still down 83% from its all-time highs in November 2021.
Financials
Asana generated revenue of $134 million in the second quarter of fiscal year 2023. This beat analyst consensus estimates by $7.93 million and popped 50% year over year.
Despite strong top-line growth, Asana is still struggling with profitability. Many “growth” companies tend to run in an unprofitable state so they can reinvest for growth. For example, the company increased its investment into sales and marketing by 69% year over year. In addition, Asana increased its R&D investments to $65 million, up 65% year over year. However, it should be noted that the overall loss reported in the second quarter was $96.2 million, which equates to approximately 80% of the company’s revenue.
Many Wall Street analysts have criticized this excessive cash burn, but there is one secret weapon the business has: its founder. As mentioned prior, the founder also co-founded Facebook, and thus it's not a surprise to find out he is a billionaire with a net worth of $9.6 billion. Asana trades at a market capitalization of just $4 billion, and thus Moskovitz could technically buy out the entire company (he already owns ~50%).
Valuation
As Asana is unprofitable, we have a harder task valuing it. The price-sales ratio is 8.41, which is cheaper than historic levels of over 70. Relative to competitors such as Atlassian (TEAM, Financial) and Monday.com (MNDY, Financial), Asana is cheaper:
Final thoughts
Analyzing the trades of CEOs can offer a key data point to help inform our investments. In this case, the CEOs of Intel and Asana are both appear to be bullish on their company's future prospects despite the short-term headwinds, based on their recent buys, though investors should note this is not a 100% certainty, just a general correlation.
Intel has a long way to go to catch up to its competitors in Taiwan, but U.S. government incentives should help. Asana has a billionaire founder, which helps to backstop the company from failing. Both stocks are potentially strong long-term investments in my view if they can get through the macroeconomic challenges within the next year or two.
