This is not a financial advice.
Hello Reddit Folks,
It is me again, trying to learn fundamentals and stock analysis. Thanks to everyone that replyied and gave me advices last time. I will be quick with introductions.
Here a link to download the pdf of my thesis on Intel Corporation, you will find also the excel on which i did my calculations too.
Have a nice reading session!
Table of Contents
CEO & Management
Analysts price target
Intel vs AMD – Evaluation Comparison
Note: some session might not be avaible here on Reddit, please feel free to read the complete report here.
Intel used to be a giant in the microchip and semiconductor sector, but recently it found itself eclipsed by its competitor in matters of quality, strategic development and public perception. Those changes are due to its recent management team, which stagnated the company and slowed it with bad management decisions. With the new CEO Pat Gelsinger and his expertise, direct experience and know-how in the sector, the company is moving out from its slowdown and trying to catch up with its main rivals.
The purpose of this thesis is to analyze the development of Intel Corporation (INTC) during the past four years, from 2018 to 2021 and forecast its activity for the next five years. Not only are the financial statements taken into consideration but also macroeconomics factors and its main competitor Advanced Micro Device (AMD).
All is made to answer the following questions:
INTC is not a dying company
INTC downtrend is following the sector and the market movement
INTC is a cyclical business, and we are in a down cycle
INTC investments will boost its revenues in the next five years
USA government will not allow one of its pivotal and strategic company to fail
INTC will face more stress as AMD is eating market share
INTC’s new products are the top-notch of the sector
When the authors initially wrote this thesis, the intention was not to take the position of an expert in company valuation. Instead, their aim was to investigate the development of a company based upon information and knowledge obtained from previous education and studies. Moreover, the underlying company for this valuation is Intel Corporation, since the authors aim to analyse a well reputable company with a strong market brand in a highly competitive market.
Secondary data is the information that doesn’t require a direct collection or studies, this information is publicly available online for the public to be consulted. Meanwhile, primary data are information that has to be collected by direct means such as interviews, measurements or polls. In this paper, only secondary data and data derived from it are used. Following the main data related to the company that are mainly used for the evaluation models:
|Growth Rate Estimate||1.28%|
|Analyst growth estimate||-0.16%|
|Next 5y Analysts growth||12.80%|
|Intel’s Corporate Bonds||4.77%|
Macro Economic Data
|Market Expected Return||9.40%|
|Risk Free Rate||4.21%|
|AAA Bond Yield||5.31%|
|Average US GDP Growth||3.18%|
|Current Market P/E||18.58|
In this paper, five evaluation methods are used to evaluate the company’s final fair value. Each method gives us different current fair values for a single share of the company. The final price tag is determined by the average price between all the methods used.
The Growth Rate of 18.26% is calculated taking in count the previous year earnings of 19.86 Billion, the retained percentage of the earnings that were not distributed of 71.59% and its historical ROE calculated by the average ROE of the last 4 years of 25.50%.
Free Cash Flow Evaluation Model
This simple model takes in mind the company 2021 Free Cash Flow of 30 billion, its WACC based discounted rate of 6.45% and its Growth Rate of 18.26% to determine a fair value of $23.57 per share.
Adjusted Graham Fair Value Formula
This model is used in the Value Investing communities to price tag a company based on its intrinsic value. This formula is created by Benjamin Graham, a value investor and professor at Columbia University who is considered the father of Value Investing.
Intrinsic value = EPS × [(8.5 + (2 × Expected annual growth rate, g)]
Which 8.5 is the P/E base of a no-growth company, and the expected growth rate is the company perpetual growth rate for the future.
In 1974, in the revised edition of The Intelligent Investor, Graham revised the formula to
Intrinsic value = [EPS × (8.5 + 2*g) × 4.4]/Y
In this formula, 4.4 is the then prevailing (1962) rate on high-grade corporate bonds listed on the New York Stock Exchange. Y is the current yield on AAA-rated corporate bonds.
Graham thought that as the investor had the choice between putting money in common stocks or bonds, it was appropriate to take into account the rate of interest paid on a high-grade bond of 4.4 per cent in determining the intrinsic value of a stock.
In this thesis we use an adjusted formula
Intrinsic value = [EPS × (7 + 1*g) × 4.4]/Y
The P/E of 7 is used because even if a company has zero growth prospects, but it is able to maintain cash flows and distribute dividends, its P/E is generally higher than 8.5.
The used growth rate is the one calculated.
The ‘2’ multiplier is too aggressive. Graham never experienced companies with growth rates of 15-25 per cent, which is common today. Instead of ‘2’, here it is used 1 instead.
The interest rate of 4.4 is left as the original, some modern adjustment put this value at 8.5, which is the five-year fixed deposit rate. This value is the substitute of the risk-free rate, which sometimes can be used instead of 4.4.
Data used for the calculation:
|AAA Bond Yield||5.31|
The Adjusted Graham Intrinsic Value Formula gives us a price tag of $97.53
Discounted Unlevered Free Cash Flow Model
A modified version of the traditional Discounted Cash Flow. This model instead of using the free cash flow, uses the unlevered one.
Unlevered free cash flow (UFCF, also known as Free cash Flow to the Firm) is the amount of available cash a firm has before accounting for its financial obligations. Free cash flow (FCF), on the other hand, is the money a company has left over after paying its operating expenses and capital expenditures. It is used to remove the impact of capital structure on a firm’s value and to make companies more comparable
In simple words. It is the cash flow of a company based on the belief that the company owes no debt, therefore has no interest payments to make.
In this model, it is taken in mind the following data:
|WACC based discount rate||6.45%|
|Average US GDP growth rate||3.18%|
|rage Shares outstanding||4,106,000,000|
Dividend Discount Model
The dividend discount model (DDM) is a quantitative method used for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value.
The model gives a negative number when companies have a lower rate of return compared to the dividend growth rate. This may happen when a company continues to pay dividends even if it is incurring a loss or relatively lower earnings, as per Intel Case. This makes this model not good to be used alone when evaluating a business.
Knowing this, the model is still used here, mainly because the final price tag is determined by the average of all the methods. This choice is made by the necessity of conservative estimates and cautious predictions. The discounted rating used here is the CAPM of 7.01%.
The model gives the following result:
|Fair Value, taking in count a perpetual growth rate. Here we used the company growth rate of 18.26% and not the average growth rate of the dividends. This is due to the fact that the price given by the dividend growth is considered to be unrealistic for the next five years.||$-15.36|
|Fair Value assuming a zero growth in the dividends’ growth. This price is not used to determine the final value due to the fact that the company has historically paid dividends with constant growth, and it is predicted to not stop this trend.||$24.62|
Total Payout Model
It is a variation of the DDF that takes in count shares repurchases. With 5.64 Billion paid in dividend in 2021, discount rate of 7.01% (CAPM) and growth rate of 18.26%, this model gives us a price tag of –$12.22
Final Fair Value
The Final price tag is determined as per following:
|Free Cash Flow Evaluation Model||$23.57|
|Adjusted Graham Fair Value Formula||$97.53|
|Discounted Unleveread Free Cash Flow Model||$56.67|
|Dividend Discount Model||$-15.36|
|Total Payout Model||-$12.22|
|Final Fair Price (Average)||$30.04|
Intel Corporation is in the Semiconductor’s sector.
As the only leading-edge U.S. semiconductor company that both develops and manufactures its own technology, Intel has a widespread economic impact in every sector of the U.S. economy and a strategic advantage over its competitors. It is also the largest publicly traded semiconductor chipmaker in the United States.
The company is responsible for creating the x86 microprocessor, which is a part of nearly all personal computers today.
Despite being a leader in its market, Intel operates in an area that has many players that compete for market share. Below are some of Intel’s main competitors.
|AMD – Advanced Micro Devices, like Intel, produces more than just microprocessors. Both companies create motherboards, servers, and other computer-related hardware. In terms of the x86 microprocessor, AMD is Intel’s biggest competitor. Intel and AMD are rivals, much like Apple and Microsoft. They have certain specifications and dedicated users that will always stick to one over the other. Products from both companies are similar in price and quality. Though Intel’s chips are primarily found in the computers of large companies, the competition between Intel and AMD comes down to individuals that build their own computers.|
|IBM – International Business Machines is one of the first computer companies in the world, Founded in 1911, it was the pioneer in computer technology during the 20th century. The company developed the ATM, the hard disk, the floppy disk, the magnetic stripe, and many more. It is one of the 30 companies on the Dow Jones Industrial Average (DJIA) and one of the largest employers in the world. IBM used to produce computers using Intel’s processors, but has since sold off that business and is now selling its own servers and mainframes using its own processors, putting itself directly in competition with Intel. The company launched a program to open source much of its architecture and firmware back in 2013, which attracted many new customers to using its Central Processing Units, stealing market share from Intel.|
|NVIDIA – NVIDIA is one of the key players in the graphics processing unit (GPU) market. It is one of the biggest names in video games. It also designs chips for mobile phones and automobiles. Many of its chips are used in supercomputers, and it is now working on artificial intelligence. Intel released a new graphics card in the second half of 2021 that is competing directly with Nvidia’s dominance in that field. It is used to compete in areas of data centre, artificial intelligence, and machine learning.|
|Samsung – In 2018, it surpassed Intel as the largest semiconductor maker by revenue, but in 2019, Intel took that spot back. It’s clear that both companies strive against one another for the top spot. Intel and Samsung don’t compete in all fields, however. Intel’s products primarily focus on desktops and laptops, whereas Samsung focuses on semiconductors for smartphones and data centres.|
|CGC – Client Computing Group includes products designed for end-user form factors, focusing on higher growth segments of 2-in-1, thin and-light, commercial and gaming, and growing other products such as connectivity and graphics|
|NEX – Network and Edge Group includes programmable platforms and high-performance connectivity and compute solutions designed for market segments such as cloud networking, communications networks, retail, industrial, healthcare, and vision.|
|DCAI – Datacenter and AI Group includes a broad portfolio of CPUs, domain specific accelerators, FPGAs and memory, designed to empower datacenter and hyperscale solutions for diverse computing needs|
|AXG – Accelerated Computing System Graphics Group includes CPUs for high performance computing (HPC) and GPUs targeted for a range of workloads and platforms from gaming and content creation to HPC and AI in the data centre|
|IFS – Intel Foundry Services is a services provider offering a combination of leading-edge packaging and process technology, world-class differentiated internal IPs (i.e.: x86, graphics, AI), broad 3rd party ecosystem and silicon design support.|
|Mobileye includes the development and deployment of advanced driver assistance systems (ADAS) and autonomous driving technologies and solutions.|
Strong Industry position: it has a strong market share in its major business segment. The main product is not easily copied.
Economies of scale: the microprocessor market i very large and Intel has a strong manufacturing plants
Strong Research: Intel’s research team is highly professional, and made some breakthrough tech that cannot be copied by other manufacturers
Strong partnership with Microsoft: this partnership limits the market share growth of competitors
Trustworthy raw material suppliers: it has a solid base of reliable raw material suppliers
Strong High-Tech culture: its products are cutting edge innovations not easy to copy
High Level of customer satisfaction: It has a dedicated customer relation department that allows it to have a high level of customer satisfaction and brand recognition
Strong Distribution Network: It has developed a dependable distribution network that can reach the majority of its potential market
High Free Cash Flow: It has strong Free Cash Flow, which allows it to grow into new initiative and reinvest in the company
Brand Recognition: It has a strong brand recognition, positive perception of its products
Social Media: Intel invests in Social Media channel to reach its customers
High costs of goods: It has high fixed costs which adversary affects profit margins
High level of debt: It has a lot of debt, which increases the interest costs on funds borrowed to finance activities.
Declining PC sales: the PC market is shrinking due to post Covid open up and cycle of the business
High Dependency on the Main Segment: Intel has a strong dependency on PC sales
Limited Business Diversification: Intel is facing challenges in diversifying. It is trying to enter the mobile phone, tablet and TV segments.
Limited Customer Care in Developing Countries: the company’s customer care is less active in developing countries, missing new potential customers
Weak R&D: the company research and development division as a small investment compared to its revenue
High Growth: its products are expected to be in high demand in the next growth cycle
Increase in Demand: expected increase in demands for personal computers and servers
Automatic Cars: this market requires high-tech processors
Drones: their usage is growing year after year and is a great opportunity for Intel
Developing Countries: are expected to grow and are an opportunity to acquire new customers and partners
Defence sector: institutional contractors might demand Intel high-tech processors for strategic tech and services
Competition: Intel is a leading leader in its industry and is facing high pressure from competitors such as: AMD, NVIDIA, Qualcomm, Samsung
Competitors’ New product launches:Competitors products are threatening Intel leadership
Price sensitivity: semiconductor market is a highly price sensitive market and cheaper products from competitors might drastically eat away Intel’s market share
Fluctuating PC sales: Intel is too dependent on this segment
Harmful regulations: the company is facing harmful regulations from countries that are trying to erode the sale of Intel’s products
Geopolitical Events: Semiconductors is a strategic industry for many countries and international political events might impact the company
Reliance on third party manufacturers: Intel and Manufacturers are highly dependent from each others
In the past three years the average increase in revenue has gone up by 0.10% showing a stagnation of sales with the growth from 2020 to 2021 being 0.47%. While having an average increase in operating expense of 2.14% with the last year increase, from 2020 to 2021, of 10.12% showing a spike in costs for the last operating period.
It is expected for the year 2022 to have both Costs and Revenue increase by approximately 18%
A point of some concern might be the small decrease in net revenue in those past 4 years, confirming a stagnation of the business.
The 2021 balance sheet shows us
Short term debt of 4.59 Billion coverable by cash and cash equivalents plus account receivables, but not only by C&C alone
Long term debt is coverable by current assets alone
Increased stockholders equity, earnings are being retained in the company and reinvested
Intel has positive Cash Flow from Operations in the last four years. Same thing for Net Cash Flow. A reduction of both can be observed for the last year.
The Company has an Income Quality ratio of 1.51, which is good and signals a healthy income.
INTC is investing heavily in PP&E
TO SEE RATIOS ETC LOOK AT THE PDF HERE
With the release of the new Intel Arc 7, with has the potential and capability to rival and surpass its competitors, NVIDIA and AMD, and a increase in demand for the year 2023, it is forecasted a growth in revenue according to the growth rate calculated of 18.26%
Analysts Price Target
TO SEE OTHER PARTS CHECK OUT THE PDF REPORT HERE, I CAN UPLOAD PICS THAT IS WHY IT IS BETTER TO READ IT FROM THE MAIN PAPER
What is its position compared to competitors?
By observing the industry and taking in count different factors such as geopolitical and market demands for electronics, we can forecast a possible development for Intel.
INTC has a strong customer base and it is known worldwide for its contributions and development of cutting hedge technologies, this is well resonated especially in developing countries such as India, China, Nigeria and Indonesia.
While its North American market share in Graphics and Motherboards got eroded by some percentage by its main competitor AMD, it still maintain a leadership position in the sector. We shall note that Intel operates in sectors which permit it to diversify a little bit its product’s portfolio, where AMD doesn’t have expertise nor is capable to compete.
With high inflation and interest rate corroding the whole market, it is expected to meet some possible downturn for the near period of time (3 to 6 months) and stabilise within a year while the FED is fighting the raising of costs. The company has strong fundamentals that shields it from possible adverse events in the near future and its cash flow quality is high.
Intel Corporation is currently undervalued due to North American Market downtrend perception of it due to the rival’s marketing attacks. It is also reasonable that the past CEO brought the company into stagnation and slowdown, but with the new one, with his expertise and experience, we can expect a turnaround and regain of some market share in the next few years.
With US Government subsidies for the semiconductor industry, we can see a deep strategic interest in bringing and boosting domestic productions and reducing potential risk from over relying on taiwanese manufacturers. This incentivised Intel to invest in two new fabs, one in Ohio and one in Arizona, plans to expand existing plants are already funded and another European production site is planned in Germany.
SWOT analysis shows us many strong moats for the business, which are its competitive advantages over competitors. Huge potentials can be exploited if the company decided to pursue an expansion strategy into developing countries and markets.
Lack of insiders sell, which the last one in february 2022, shows us that the management is confident in the company’s future development, which is confirmed by additional buying from the CEO itself in the last months. Big Institutions and Mutual Funds hold portions of the company too, signalling strong sentimento towards the company. Employees rating and satisfaction rate is high, salaries aren’t that much different from rivals.
Is the company a Buy or a Sell?
The company is distributing regular dividends, it has strong fundamentals and lots of cash to meet adverse events. Institutions and insiders are holding. The current downtrend is due to market trend and social mechanism, of which contributed AMD marketing in damaging Intel’s perception in the CPU segment.
Fundamentally though, the company has many potentials and growth opportunities, especially now with its new release Intel Arc 7.
Intel is a smart investment for long term holders, not only because its intrinsic value is expected to grow, but also for the fact that it pays high dividend’s yield. If the company was in a severe situation, it still can retain earnings to cover expenses, even if it is unlikely due to its present liquidity.
In the end, the verdict is one: Buy. Fair Value is $30.
What are you thoughts? Is Intel a Buy or a Sell? Let us all know!
This is not a financial advice.
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