INTC: Analysis of Intel Corporation and its Q4 2020 results

Intel was founded in 1968 and is headquartered in Santa Clara, California. Intel designs and manufactures chips for personal computers, data centers etc., Its competitors include AMD,NVIDIA,TSMC, Samsung etc.,

• Intel’s business includes PC Centric(50%),Data Center Group(35%),Internet of things(5%), Non Volatile Memory solutions group(5%), Programmable Solution Group(4%) and Mobileye(<1%). Please note that these are approximate percentages.
• Intel has been behind on its next generation chips which has caused loss in its market share causing decline in its stock price. For instance, last July Intel announced that their 7nanometer chips are delayed till 2023 whereas AMD was already selling them.
• Intel’s customers – Amazon, Microsoft and Apple have started making their own chip designs and plan to get them manufactured in East Asia. This is a loss but not a big part of Intel’s  revenue.
• Third Point hedge fund has around $1Billion stake in Intel. In Dec’2020 its Chief Executive wrote to Intel chairman  Omar Ishrak calling for immediate action to boost Intel’s position in PC Centric and Data Center Group businesses. Following which Intel announced that Pat Gelsinger will take over as the new CEO on 15-February-2021 from Bob Swan.
• Pat Gelsinger comes from VMWare where served as CEO from Sep,2012 to Feb,2021. He worked at Intel Corporation for 30 years and left with a title CTO in Jan,2005. Bob Swan was from finance background and investors demanded a CEO with engineering background to take over. Engineering background and his career at Intel in the past could be  possible reasons for his appointment.
• Splitting the chip design from manufacturing operations is one of the options discussed by the company. This would help Intel to produce better chips at lower cost by outsourcing manufacturing operations. This option has been rejected by Intel’s executives.
• Market Cap =$224.46B, PE Ratio = 11.22, Quarterly Profit Margin =26.84% (Good,>10%)

Quarterly Results:

• Fourth-quarter revenue was $20.0 billion, exceeding October guidance by $2.6 billion and down 1 percent year-over-year (YoY). Full-year revenue set an all-time Intel record of $77.9 billion, up 8 percent YoY.
• Delivered outstanding fourth-quarter earnings per share (EPS) of $1.42 ($1.52 on a non-GAAP basis, exceeding October guidance by 42 cents).
• In 2020, Intel generated a record $35.4 billion cash from operations and $21.1 billion of free cash flow (FCF) and returned $19.8 billion to shareholders.
• Forecasting first-quarter 2021 revenue of approximately $18.6 billion (non-GAAP revenue of $17.5 billion); expecting first-quarter EPS of $1.03 (non-GAAP EPS of $1.10).
• Cash dividend increase of five percent to $1.39 per share on an annual basis. The board declared a quarterly dividend of $0.3475 per share on the company’s common stock, which will be payable on March 1 to shareholders of record on February 7.

Pros:

• Current Assets($47.249B)> Current Liabilities ($24.754B).
• Shares outstanding have gone down from 4.69B in 2017 to 4.06B.
• Dividend Yield forward = 2.38%. Dividend Payout ratio=26.72% indicates there is room for dividend increases in future.
• During last four years, Revenue  grew from $62.76B to $77.87B and earnings grew from $9.6B to $20.9B , Free Cash Flow grew from $10.332B to $20.931B a
• Average FCF per share = 4.33. Shares are trading at 12.76 times the FCF which is good.

Cons:

• Selling Intel’s manufacturing facilities may not be easy as they are customized to Intel’s processes. Also, getting an approval would be difficult from US National Security Agency to divestment.
• Intel lost its dominant position in  microprocessor manufacturing to  TSMC(Taiwan Semiconductor Manufacturing Co) and  Samsung Electronics Co Ltd.
• Intel is losing its share in PC Centric and Data Center Group businesses to AMD(Advanced Micro Devices)
• NVIDIA Corp is dominating the computational models used in AI applications where Intel is yet to make an impact.

Final Thoughts:

There is not much wrong with Intel fundamentally as its made out to be. Pat Gelsinger  understands requirements of cloud technology. Turnaround has started.

When compared to the competition– Intel ‘s stock price is a steal for what you are getting.  P/E ratio of AMD is 41.83,NVIDIA is 85.56, TSM is 54.86 – Intel at 11.22 is very attractive. Invest in Intel if you are ready to hold for 5 years.

Be fearful when others are greedy, and greedy when others are fearful.