Intel Corp. – Scale CPU Business against Dynamic Competition

Intel Corp Stock Analysis

Intel Corp. is a world leader in designing and manufacturing microprocessors’ products and technologies found in PCs and servers. The company is evolving from a PC-focused company to a data-focused company. The portfolio of products aimed to offer computing, storage, and network solutions.

The company’s segments are Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, All Other and New Technology Group. The Data Center Group segment focuses on silicon devices and SSDs. Internet of Things Group segment creates, stores, and processes data generated by connected devices to retailers, manufacturers, energy companies, automakers, and governments. The Client Computing Group unit is the largest segment at Intel. The PC market continues a critical aspect of the company’s business.

Overview

Typically, Intel’s net revenue has improved in the second half of the year, accelerating the third quarter and peaks in the fourth quarter. The increase in demand will be observed because of the short-term spike in home office equipment, but eventually, the demand will decline after this one-time surge. The global outlook for the computer hardware sector was slashed due to the economic consequences of the spread of the Covid-19, interference to supply chains, and retail operations. However, tablets, hybrids, gaming PCs are the primary growth opportunities for the retail market. Intel’s reliable consumer electronics product range, technology-literate population growth support demand for the company’s productions. The company will profit from the end of Windows 7 support in the current year, generating for the investment PC market.

Intel vs SP500 daily returns 202006
Source: BrightHedge

For 2019, the company reported USD 72 billion revenue, increasing by 2%, somewhat over its stated projection of USD 71 billion. The first-quarter revenue of 2020 was USD 19.8 billion, up 23.5% year-over-year.

Intel has been developing its production for years by estimating that its transistor intensity will double every two years per Moore’s law. Costs, power, and dimensions will decrease in parallel. The sector expected intensive capital costs and high research and development expenditures. Intel’s spending more than 17.5% of its revenue on research and development, and its assets allocate more than 17% to investment expenditures each year, enabling control of the design and production processes of the entire industry. Despite all these benefits, the company has 10-nanometer process obstacles, which are the most crucial focus of the competition in the industry. It plans to sort out this difficulty with the transition to the 7-nanometer process in 2021.

The expansion of mobile devices has resulted in the deterioration in the PC market, which Intel surpasses its competitors. This new trend helps ARM and AMD to balance the competition. Nvidia and its AI-focused capabilities have revealed a new contender.
The increased demand for cloud computing facilitates indirect benefits for Intel’s data center group. Strong demand is expected in server processors as mobile devices become widespread, and complicated computing is forecasted to be produced in the cloud. Cloud infrastructure requires extensive server configuration. Altera and AI-related acquisitions will be helpful in meeting server needs according to the necessities of customers.

Investment Characteristics

The company targets low single-digit revenue growth over the next three years to USD 76 billion – USD 78 billion. The company also expects its data center segment to contribute more to its objective. Intel also forecasts that its PC-centric client computing division to flat or slightly down. We applied the Fama-French 3 Factor Model for the prior three years. The company act as a large-growth stock. However, Intel is categorically classified as a large-value company. The company’s 3-year daily beta is over 1.2; however, its 5-year daily beta is less than 1.

Intel vs peers 5-yr beta 202006
Source: BrightHedge

Intel dedicated its research and development investments to evolve as a data-centric company. The company invests in research and development and capital spending to improve its competitive position. The company also increased its capital spending in logic to not fall behind the competition against AMD and Taiwan Semiconductor. Intel’s PC and data-centric dominance likely generate excess return opportunities for its investments in the long term.

The company’s considerable research and development spending of approximately USD 13 billion annually in the last five years requires large volume productions and high-profit margins to be proactive against AMD and Nvidia.

The company divested the 5G related modem business to Apple to allocate its business for meeting its strategic business objectives. Intel acquired Habana Labs to boost AI-related data-centric operations for approximately USD 2 billion. The company also acquired Barefoot Networks to enhance ethernet switch silicon for data-centric businesses for an undisclosed price.

Apple plans to phase out its collaboration with Intel for CPU chips for its computer lineup. Apple’s total market share in the PC market is about 6%, and its purchases demonstrate nearly 2% to 4% of Intel’s revenue. Apple has a record of establishing an extensive burden on vendors. Intel’s 5G divestment to Apple confirms Apple’s pressure. Apple’s CPU chip plans may provide more motivation and growth opportunities for Intel to develop strategies for data-centering, AI-related, and Internet of Things operations. The surged development and capital spending in the cloud and data-center business areas with storage, networking, and AI-focused investments will benefit the company’s diversification strategy.

Valuation

Our fair value estimate for Intel is USD 70 per share. The adjusted P/E ratio of 13.6 times is calculated with our fair value estimate. We estimate around 4% to 6% revenue growth in our discounted cash flow model over five years. We projected that Intel’s PC segment revenue contraction in steady single-digit territory. However, AI-related data-centric operations will contribute to consolidated growth opportunities for Intel, while detrimental competition in the PC market counteracts these opportunities.

The company’s prominent position in the PC industry is related to substantial research and development expenses, vital to maintaining competitive advantage and market share. However, continuous steep capital and research expenses will produce stress on PC segment profit margins. We believe that Intel has more growth abilities on data-centric and AI-focused research spending.

Intel vs SP500 correlation matrix - 3-year rolling 20206
Source: BrightHedge

Risks to Consider

Intel is not able to promptly react to competition and deviation in demand due to the intricacy of technology hardware and equipment manufacturing processes. The company’s high fixed-cost fabrication facilities prevent profound short-term adjustments. The industry’s cyclical nature results in fluctuating profitability despite its success in designing its processors to new markets. Intel experiences fierce rivalry across its product portfolio from companies offering CPU chips, such as AMD and Qualcomm, GPUs, including those provided by Nvidia. Some competitors have developed, and utilized computing architectures, such as ARM, and these platforms produce a beneficial ecosystem for customers and developers, such as Apple Silicon. These architectures and platforms grow at scale and result in a significant impact on Intel’s competitive position.

Intel and peers Systematic and Unsystematic Risks 202006
Source: BrightHedge

Moore’s Law is the company’s strategic priority, and the company focuses on developing next-generation process technologies at breakthrough nodes. However, Intel’s substantial delays in applying a 10-nanometer process while competitors using Taiwan Semiconductor’s viable process technologies increase the aggressive environment.

Intel’s three largest customers, Dell Inc., Lenovo Group Ltd., and HP Inc., account for approximately 40% of its revenue in the last three years. The demand for Intel’s products from these key customers is critical for the company. The delays in orders or internal developments of these customers’ custom CPU chips may significantly reduce revenue.

Other Considerations

In 2015, Intel completed Altera’s acquisition for USD 16.7 billion in data-centric devices that include networking equipment. The deal has favored the data center group and balanced its revenue growth in recent years during moderate demand for the client computing group. Intel also acquired Mobileye, the dominant player in driving assistance and automation solutions, for USD 15.3 billion. Mobileye has expertise in signal processing, computer vision, and machine learning tasks, including deep neural networks.

Robert Swan is the director and CEO of the company. He has a non-Intel and finance-leaning experience in a full of engineering company. With Mr. Swan’s leadership, Intel develops products with smaller teams and establishes collaboration between production and design engineers. The company is working hard to put the CEO’s “One Intel” strategy into its corporate culture. The approach encourages more responsiveness for customers, more ethical precision in organizational structures, and a more cooperative environment. The company has focused on enhancing interactions with key customers, evaluating competing developments, and boosting supervisory processes.

Conclusion

10-year stock performances of Intel and its Peers

Intel vs Peers Stock Performance 202006
Source: BrightHedge

10-year stock performances of Intel and its Peers, excluding Nvidia

Intel vs Peers excluding Nvidia Stock Performance 202006
Source: BrightHedge

Risk/ Return Matrix of Intel and its Peers

Intel vs peers risk return matrix 202006
Source: BrightHedge

The 10-year historical stock performance of Intel is above average compared to SP500. However, when we reached the technology peer group, Nvidia and AMD had better stock performances. In the risk/return matrix, Intel’s historical annual return and risk are more balanced than its peers; nonetheless, the historical annual risk of Intel is still above the SP500 annual risk.

30-year Return Triangle of Intel

Intel 30-yr Return Triangle 202006
Source: BrightHedge

Intel’s 30-year return triangle indicates that the stock performance may fluctuate severely. The historic return triangle also reveals that even a 15-year holding period of the company’s stock resulted in negative returns in some periods.

Disclosure: I do not have any of the securities mentioned above. This article expresses my own views, and I wrote the article by myself. I am not receiving compensation for it. I have no business relationship with any company whose security is mentioned in this article.

Sources: SEC filings

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Covers investment, financial analysis and related financial market issues for BrightHedge. He has extensive experience in portfolio management, business consulting, risk management, and accounting areas.

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The investment information, comments and recommendations contained herein are not subject to investment advice. The comments and recommendations contained herein are based on personal views. These views may not fit your financial situation and your risk and return preferences. For this reason, based only on the information contained herein, investment decisions may not have the appropriate outcome.