A legacy semiconductor manufacturer founded in 1968, Intel Corp. (INTC, Financial) is famous for its central processing unit chips, which are effectively the “brain” of a computer. Its genius marketing helped the company stay on top as it struck a deal with original equipment manufacturers to ensure its famous Intel sticker remained embedded on the front of PCs.
Intel continued to perform well over the decades and increased its share price by 322% between 1998 and March 2021. This is in aggregate after huge booms and busts during the tech bubble and even the financial crisis. However, in April 2021, Intel’s stock price was butchered by 59% from its decade high. This was mainly driven by production issues as the company fell behind on its 7nm chips, which effectively caused a bottleneck in progress.
To put things into perspective, Intel now trades at the same share price as in 2014.
Some analysts believe this could be the end for Intel, but resilience is one characteristic the company has showcased time and time again.
Production challenges
The semiconductor manufacturing space is all about innovation and staying ahead with new technology. Intel’s production issues enabled competitor Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) to get ahead and continue to produce 7nm chips and even 5nm chips. In December, the Taiwanese company even announced it has the manufacturing capacity to produce 3nm chips.
Intel has had to bow its head to Taiwan Semiconductor and outsource some of its manufacturing to the business.
This all may seem terrible for Intel, but it still has the dominant market share in the PC and server processing market with approximately 70% market share. This is down from 90% in 2017, but still solid overall.
Market growth and legislation tailwinds
Despite the challenges, Intel is still a leader in the growing semiconductor industry. According to Fortune Business Insights, the industry is forecasted to expand at a 12.2% compound annual growth rate and reach a value of $1.38 trillion by 2029.
McKinsey also forecasts a “trillion-dollar” industry thanks to the growth in internet of things devices and even wearable technology like augmented reality and virtual reality headsets.
In 2022, the Biden administration also announced the CHIPS act, which pledges a staggering $280 billion to help boost domestic semiconductor production over the next 10 years.
Semiconductor manufacturing is currently heavily concentrated in Taiwan, which is next to China. China has vowed to pursue technological independence and the rhetoric towards Taiwan has become increasingly aggressive. The U.S. now realizes its dependence on other countries for its technology is both a military and business risk. Thus, the CHIPS Act is poised to bolster U.S. semiconductor manufacturing and should help Intel immensely.
The funds related to the CHIPS Act are split with $52.7 billion related to semiconductor manufacturing, research and development and workforce development. In addition to another $24 billion worth of tax credits for chip production. $3 billion is set to go toward the development of cutting-edge technology and even wireless supply chain management.
Financial review
Intel reported mixed financial results for the fourth quarter of 2022. Its revenue was $14.04 billion, which missed analyst estimates of $14.45 billion and declined an eye-watering 32% year over year.
This decline was driven mainly by lost market share and the cyclical decline in the overall semiconductor market.
During the earnings call, CEO Pat Gelsinger said, “We lost share, we lost momentum, but think that stabilizes this year."
The positive for Intel is the semiconductor industry is still forecasted to grow due to the aforementioned tailwinds. Therefore, the “cyclical decline” is just a correction in demand, which is expected after the huge surge in demand seen in 2020-21.
By segment, Intel reported revenue in line with its expectations for the data center and artificial intelligence segment and network and edge segment. Its main revenue impact was in the client computing group.
Moving onto products, Intel launched its Xeon scalable CPU, known as Sapphire Rapids, which was a major milestone. The chip competes directly with Advanced Micro Devices' (AMD, Financial) EPYC.
Intel launched the chips at an event and received customer testimonials from major players in the industry, including Microsoft (MSFT, Financial) Azure, Nvidia (NVDA, Financial), Alphabet's (GOOG, Financial) Google Cloud and Dell Technologies (DELL, Financial). There is a lot of excitement for these chips and a strong backlog of demand. Intel plans to ship 1 million units by the middle of the year.
Another pocket of positivity for Intel was its self-driving vehicle software unit, Mobileye, announced a strong 60% increase in its revenue year over year. This was driven by a series of design wins, which are expected to equate to future revenue of roughly $6.7 billion across 64 million units.
Moving onto profitability, Intel reported a fourth-quarter earnings loss of 16 cents per share, which missed analyst estimates by 7 cents. This was driven by market share losses, production delays and the overall market demand.
Intel has $28.3 billion in cash and short-term investments on its balance sheet. The business does have high total debt of $42.4 billion, but the vast majority of this ($37.68 billion) is long-term debt.
The company also has a fantastic forward dividend yield of 5.22%, which makes it appealing for income investors.
Valuation
Intel trades with a price-earnings ratio of 14.5, which is cheaper than the IT sector average of 24 and its five-year average.
The GF Value Line indicates a fair value of $43.77 per share based on historical ratios, past financial performance and analysts' future earnings estimates. As such, the stock is significantly undervalued at the time of writing.
Final thoughts
Intel is a legacy semiconductor company that is currently facing a series of major headwinds.
On the production front, the company has fallen behind and is experiencing huge delays in its products. On the competition front, Taiwan Semiconductor Manufacturing is producing smaller and smaller chips, while AMD is rapidly increasing its market share with new high-performance chips. The positive for Intel is it still has a dominant market share in the CPU market and the CHIPS Act should help bolster its domestic production efforts.
In addition, the stock is deeply undervalued at the time of writing.
I do expect Intel to struggle for at least the next one to two years due to the cyclical decline in the semiconductor market. However, as the industry is still growing, the company could bounce back in the long term.
