INTC

Investment Analysis Clubs Value Hounds
6

I’ve written extensively on INTC here:
https://discussion.fool.com/down-to-under-50-per-share-from-a-hi…

And in this thread, here:
https://discussion.fool.com/the-comparison-is-not-with-ibm-but-t…
and here:
https://discussion.fool.com/tsm-has-a-location-problem-tsmc-alre…

Summary of my current position is that Intel is only starting to feel the pain.

I have suggested that Intel is on sale at bargain basement prices given it’s steady, if uninspiring, performance over the past decade. Revenues have grown a paltry 4% per year, while earnings and EPS have grown by by 7.3% and 9.9% respectively. Part of that discrepancy is explained by Intel putting its healthy cash flow toward the steady repurchase of shares, as well as a healthy return of dividends to shareholders.

I’m expecting Intel’s revenues to decline from here.

  1. They are facing increasingly stiff competition from AMD on both the client and server sides.
  2. They’ve lost their single biggest customer, Apple.

The plan is for the new foundry business to make up the gap. Intel has tried and failed to run a merchant fab before. But this time is different!

According to Intel itself, Q1 2022 results from the foundry business were negligible, and a net loss.


Net revenue and operating income (loss) for each period were as follows:
                                                      Three Months Ended
(In Millions)                                      Apr 2, 2022 Mar 27, 2021
Operating segment revenue:
Client Computing
    Desktop                                            $ 2,641      $ 2,770
    Notebook                                             5,959        6,956
    Other                                                  694          997
                                                   ------------------------
                                                         9,294       10,723

Datacenter and AI                                        6,034        4,940
Network and Edge                                         2,213        1,799
Accelerated Computing Systems and Graphics                 219          181
Mobileye                                                   394          377
Intel Foundry Services                                     283          103
All other                                                   67        1,724
                                                   ------------------------
Total operating segment revenue                       $ 18,504     $ 19,847
                                                   ========================

Operating income (loss):
    Client Computing                                   $ 2,827      $ 4,288
    Datacenter and AI                                    1,686        1,706
    Network and Edge                                       366          243
    Accelerated Computing Systems and Graphics            (390)        (176)
    Mobileye                                               148          171
    Intel Foundry Services                                 (31)         (34)
    All other                                             (265)      (2,504)
                                                   ------------------------
Total operating income                                 $ 4,341      $ 3,694
                                                   ========================

Clipping taken from p.9 of Intel’s most recent 10Q, available here:
https://www.intc.com/filings-reports/all-sec-filings/content…

The contrary thesis is that Intel is a slow moving brontosaurus in a landscape increasingly dominated by more agile raptors. To make maters worse, they are choosing to redirect all of that FCF back into a risky venture involving the establishment of Intel as a domestic chip foundry. They have committed at least $20 billion to this effort.

The dinosaur analogy is apt, but the competition are mammals. There are no other dinosaurs left at this point. The question is whether Intel will evolve into a bird or perish as a dinosaur.

I believe Intel is setting itself up as the go to supplier of chips for the US economy well into the 21st century, and I believe that current concerns about the economic and political risks of reliance on one region, or one country, for our supply of vital capital inputs is too great a risk for the American economy and American political leadership in the world.

I address this in the links at the top. Chip designers can’t simply move a design from one foundry to another. So you pick a foundry and you’re largely stuck with your choice. I expect most of the semiconductor industry will be skeptical of the new Intel Foundry Services 2.0. Intel has pulled the rug on folks in the past, and Intel’s processes are notoriously difficult to work with. The implication is that it will be difficult for Intel to achieve its goals for the IFS business.

So on both a value basis, and on a strategic basis, I believe that Intel will be a great investment going forward, especially at these depressed prices.

I disagree. Too many things have to go exactly right for this scenario to play out. I expect Intel will survive, for quite a while, but shareholders will be disappointed. I’m not sure there’s a share price that would tempt me to buy here. Certainly nothing above $30.

Regards,

  • HCF
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