Intel Corporation (Ticker: INTC) - Brief Breakdown

In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.

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Company Description

Intel Corporation designs, manufactures, and sells semiconductor chips, microprocessors, microchips, motherboard chipsets, network interface controllers, integrated circuits, flash memory, graphic chips, embedded processors, and other hardware found in computers and similar products. Intel also provides Internet of things products such as high-performance computing solutions for targeted verticals and embedded applications, computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology. Intel is the world’s largest semiconductor chip manufacturer by revenue and has collaborations with UC San Francisco’s Center for Digital Health Innovation, Fortanix, and Microsoft Azure to establish a computing platform with privacy-preserving analytics to accelerate the development and validation of clinical algorithms. 

Quantitative Analysis

At the time of this writing (10/17/2021), INTC is trading at $54.46 with a 52 week range of $43.61 - $68.49 and a market cap of $220.94B. In Q2 of 2021, GAAP revenue was flat year over year at $19.6 billion and non-GAAP revenue was up 2% year over year to $18.5 billion. GAAP earnings-per-share was $1.24 and non-GAAP EPS was $1.28 which exceeded the expected EPS by $0.23 in Q2 of 2021. Return of equity (ROE: Net Income / Total Equity *100) of INTC is 23.15% and net margin (net income / revenue) is 23.91%. The price to earnings (price per share / earnings per share) ratio was 12.09 and the debt to equities ratio (total liabilities / total equity) is 0.81. The dividend yield for INTC is 2.52%. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view INTC’s 2021 Q2 earnings here and their 2020 Annual Report  here

Qualitative Analysis

Intel is a chip making giant, but has had a rough go over the past five quarterly earnings reports. Four months after taking over as CEO of Intel, Pat Gelsinger has made a list of leadership changes detailed in a recent press release. Although there were some bumps in the road, Intel was still the number 1 semiconductor vendor by revenue in 2020, in part due to their close partnership with Windows software maker Microsoft. With the growth of smartphones and other computing devices, the demand for Intel’s computer chips has diminished, but Intel maintained 15.6% market share last year, up 3% over the second lending vendor Samsung. Intel took a big blow in June 2020, when Apple revealed that it is moving to its own chips for Mac computers. Intel has changed management but the loss of Apple hurts, hopefully the chip giant can bounce back and gain another major client. 

Bullish Thesis 

Here are three points to support the bullish thesis:

  • Chips in Everything: From laptops to cars to kitchen appliances, computer chips are being added to nearly everything. As the world moves more toward “smart” devices and the Internet of Things (IoT; interconnected devices), demand for processor and graphics chips will continue to rise. As an existing giant in the space, Intel has a “first mover” advantage, existing infrastructure in place, network connections, and time-proven competency. These advantages will help Intel remain at or near the top of the chip manufacturing food chain.   

  • Dominant Market Share Versus Competition: One of Intel’s primary competitors in chip manufacturing is Advanced Micro Devices (AMD). Although AMD has recently been eating into Intel’s dominant market share, Intel remains well ahead of its rival in desktop PC, mobile/notebook, and server unit processors. For a better picture of the overall market, research firm Omida included all x86 units - this captures IoT and semi-custom devices not captured in PC/Mobile/Server breakdowns - and found that AMD is beginning to eat into Intel’s market share. However, a similar trend occurred in 2005-2009 before dying back down. Time will tell whether this uptick in AMD will continue or meet the same end it met nearly 15 years ago. For a more in-depth look at market share comparisons between Intel and its chip competitors, check out this fantastic analysis from tomshardware.com

  • GPU Production: Although the bulk of Intel’s revenue is generated through PC and data center processors, it recently relaunched discrete GPU production. Intel has tried several times in the past to enter the GPU market, but has never seemed to gain traction. Although they will be competing against the likes of Nvidia and AMD, Intel has an opportunity to create and develop a revenue stream that would add to their already strong moat. If Intel can finally get their GPUs to stick, look for the company’s value to increase. 

Bearish Thesis

Here are three points to support the bearish thesis:

  • Lack of Recent Success: Intel has not had any recent success the past five quarters, which should be taken with a grain of salt as it was the number 1 semiconductor based on revenue in 2020. Even with that, Intel has yet to see any real growth in the past five quarters. This is alarming in a rapidly growing industry with increasing demand and with the reputation that Intel has, it should be able to show some growth. New leadership is in place with hopes to lead Intel in a new direction and help with quarterly and yearly growth but time will tell if that happens. 

  • Limited Big Name Suppliers: After Apple announced it will not use Intel’s chips anymore, the only big name users of Intel’s products is Microsoft. This will hurt Intel’s overall revenue and has created a crack in Intel’s lead as the top semiconductor producer. With increased competition, such as Nvidia (which we broke down last week find the article here) this will hurt Intel going forward. It is difficult for large corporations to continually innovate and as technology improves and the demand increases, more companies will come into the game. With more competition and the lack of the backing of big name suppliers, this will put a dent in Intel’s lead going forward.

  • Chip Shortage: It is tough to ignore the chip shortage currently going on in the short term. According to CNBC, the chip shortage may last for 2 to 3 more years. The shortage has affected car prices, appliances, and just about everything that has a “smart” aspect to it. This is causing more companies to reconsider their chip manufacturer and potentially develop their own chips. Self development of chips will eliminate the need for companies like Intel, unless Intel can prove that their chips are superior and continually are superior. This will be an interesting next two to three years for Intel and if they can hold their lead through this shortage.   

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If you’re new to stock investing, check out our introduction to stock investing series:

  1. What is Investing and Why Should I Do it?

  2. How to get Started in Stock Investing

  3. Stock Investing Basics

  4. Overview of Stock Investing Strategies

  5. How to Develop a Thesis for a Company

  6. When to Sell a Stock

Have a great week everyone, 

Brandon & Daniel

Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.