INTC

Intel Corporation

36.34
USD
-2.86%
36.34
USD
-2.86%
35.88 57.45
52 weeks
52 weeks

Mkt Cap 147.43B

Shares Out 4.06B

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Is Intel A Good Stock For 2022?

Article Thesis On the back of a broad tech pullback, Intel Corporation (NASDAQ:INTC) has seen its shares pull back to a 52-week low. Intel has issues and is losing market share to competitors such as AMD (AMD), but at the same time, the company is still one of the largest semiconductor companies in the world. At current valuations, not too many things have to go right for Intel to be a solid long-term investment. Intel: Issues And Opportunities Intel has severely underperformed its peers such as AMD and NVIDIA (NVDA) over the last couple of years, both in terms of business growth and when it comes to share price performance -- INTC is up just 21% over the last five years. There are several reasons for that, but operational issues are the most important one. Process delays and a failure to keep up with its peers' products explain why Intel has been losing market share in important markets such as data centers, but also in the consumer space. Intel's Ice Lake microprocessors, for example, have lost market share versus AMD's Milan series, as Seeking Alpha reports -- reasons for AMD's market share gains include better efficiency, while pricing also played a role. Since AMD has been increasing its prices on the back of strong demand, that has made the price differential shrink over time, however. Intel's issues and relative underperformance versus its peers is somewhat surprising when we consider that it spends way more money on business growth, both via R&D and capital expenditures: Intel's R&D expenses are 3x as high as those from NVIDIA, and around 5x as high as those from AMD. The difference is even wider when we look at capital expenditures, although that is explained by the fact that NVIDIA and AMD operate fabless, whereas Intel is investing heavily into growing its production capabilities. The way higher R&D spending that does not lead to enormously better products today is both a weakness and a potential opportunity. On one hand, Intel's R&D seems to be less efficient as that of its peers, which is a problem. At the same time, Intel could possibly cut its R&D expenses meaningfully by getting rid of non-productive or underperforming departments. This would have an immediate effect on its profits. INTC Stock Key Metrics Intel's massive spending on production facilities leads to lower free cash flow generation, all else equal. But at the same time, capacity expansion and Intel's foundry business should result in ample growth opportunities in the mid-2020s when these investments should start to pay off increasingly: In the above chart, we see the analyst consensus revenue forecast for 2022 and beyond. Growth will clearly be accelerating over the coming years if the analyst community is correct, from a pretty low level of ~1% to a double-digits pace in 2025 and beyond. In the near term, due to the heavy growth investments that are needed to build up that capacity, Intel's profits will likely remain under pressure and should not grow much. In fact, Intel is forecasted to see its earnings per share decline in both 2022 and 2023, before earnings per share are forecasted to rise again. That being said, the forecasted earnings per share of $6.00 for 2026 looks quite promising. Of course, there is no guarantee that Intel will actually hit that target, as execution has been a major issue for Intel in the past. But the company's relatively new CEO Pat Gelsinger seems to be making progress when it comes to improving performance, and global tailwinds for the semiconductor industry should help Intel as well. In the long run, semiconductor demand will both rise in the consumer space as well as in the commercial space. Our lives are becoming ever more digitalized, the internet of things and trends such as AR/VR and autonomous driving will lead to steadily growing demand for microprocessors for all kinds of products. Market share gains are thus not necessary for Intel to generate some growth over the years. At the same time, the buildout of its foundry business is promising from a geopolitical perspective. Today, fabless producers are highly reliant on manufacturers such as Taiwan Semiconductor Manufacturing Company (TSM), which has considerable macro risks due to the potential of an escalating China-Taiwan conflict. With Intel providing an alternative in the future that is less impacted by a potentially escalating Taiwan conflict, demand for Intel's manufacturing capacity should be healthy. TSM's price hikes over the last year showcase that foundries have ample pricing power, which could result in compelling margins for Intel's foundry business as well. Is Intel Stock A Fair Value? We can easily say that Intel is considerably cheaper than its peers when we look at static ratios such as price to earnings: Intel trades at 12x forward net profits, while its peers are 80% and 150% more expensive, respectively -- despite huge pullbacks experienced by AMD and NVDIA over the last couple of months. When we look at the EV/EBITDA ratio, the discount is even more pronounced. To some degree, that makes sense, however. Intel operates with a lower EBITDA to FCF conversion due to its larger capital investments, which justifies some discount compared to its peers. We should also consider that Intel has not grown as much as its peers in the recent past, and that its near-term earnings growth outlook is considerably worse than that of AMD and NVIDIA. It would thus not be justified for all three companies to trade at the same valuation. I do believe that NVIDIA is the least attractive value today, as it is trading with the highest earnings multiple by far. AMD has better forecasted growth for the current year and is trading at a way lower valuation, which makes it a pretty solid value, I believe. Intel looks like a solid value as well. Weak earnings growth in the near term is an issue, but the current valuation seems to account for that already. If Intel really manages to hit earnings per share of $6.00 in 2026, as the analyst community believes, then the current share price of $43 is very undemanding. Intel's dividend yield is also at a multi-year high, which indicates that the valuation is at least very decent for income investors. The yield of 3.3% is also more than twice as high as the broad market's dividend yield of 1.6%. Intel will likely not report overly strong results for 2022, thus it doesn't look like there will be a major catalyst from an earnings perspective. Instead, catalysts for Intel in 2022 could come from other directions. One such catalyst could be Intel's planned spin-off of Mobileye, which could unlock value for shareholders. If the company releases positive news regarding its progress in improving processes, that could also be a catalyst. Intel has been a stock where non-earnings news can have a huge impact on the stock price. Early last year, for example, the CEO change made Intel's shares jump to the mid-$60S in a relatively short period of time. At the current price, Intel is trading at the bottom of its recent trading range that has been in the low-$40S to the high-$60S over the last couple of years. That doesn't guarantee that shares will climb, of course, but it could be an indication that a rising share price is more likely than a falling share price. Since rising rates are hitting expensive growth stocks especially hard, one can also argue that Intel is a favorable pick from that perspective. Not a lot of growth is priced into the stock today, such a rising discount rate should have a below-average impact on Intel. That being said, if broad markets continue to struggle, Intel would most likely not be completely immune to that, although it could continue to perform better than NVIDIA and AMD, as it has done in recent months during this growth sell-off. Is INTC Stock A Buy, Sell, Or Hold? The broad market has been struggling in recent weeks, and that does not necessarily end in the near term. Intel also will most likely not report strong earnings in the near term, thus from a business growth perspective there is no rush to enter a position. On the other hand, Intel is trading at the bottom of its multi-year trading range, and non-earnings news have resulted in strong rallies in recent years. For those that want to speculate on such a rally, Intel could be a solid buy at current prices. For longer-term investors, Intel has potential, I believe, but they may want to wait for the broad market to bottom before buying. Is This an Income Stream Which Induces Fear? The primary goal of the Cash Flow Kingdom Income Portfolio is to produce an overall yield in the 7% - 10% range. We accomplish this by combining several different income streams to form an attractive, steady portfolio payout. The portfolio's price can fluctuate, but the income stream remains consistent. Start your free two-week trial today! This article was written by According to Tipranks, Jonathan is among the top 2% of bloggers (as of July 19, 2019: https://www.tipranks.com/bloggers/jonathan-weber). If you want to reach out, you can send a direct message here on Seeking Alpha, or an email to jonathandavidweber@gmail.com. Disclosure: I work together with Darren McCammon on his Marketplace Service Cash Flow Kingdown. Disclosure: I/we have a beneficial long position in the shares of INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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