Intel Stock – The Giant Staggers – Columns

Intel shares performed disappointingly this year. While AMD since the beginning of the year by around 75 percent and Nvidia In spite of a comparatively high dividend yield of almost 3 percent, Intel shareholders looked into the tube in terms of performance. After a strong start to the year at an all-time high, Intel shares fell by over 30 percent in the following months.

In the wake of the disappointing price development, however, some valuation parameters now indicate with exclamation marks that the share is currently being traded as a bargain. In this stock analysis we will show you whether the high price losses of the stock are exaggerated. In addition, we point out some pitfalls in stock valuation and show how a supposedly shareholder-friendly management can have negative long-term effects on the company’s success and ultimately also on the share price.

Intel’s business model: This is how the chip giant makes money

Intel is one of the largest semiconductor manufacturers in the world. And the company with a market capitalization of EUR 168 billion is still valued almost twice as high as AMD with a market capitalization of EUR 89 billion. Only Nvidia overtook Intel in the middle of the year and, thanks to rising share prices, has a capitalization of over EUR 281 billion. All three companies compete in important future markets such as CPUs (Intel and AMD) and autonomous driving (Intel and Nvidia).

Intel stock
logo Intel logo
country United States
Branch Chip manufacturer
Isin US4581401001
Market capitalization € 167.9 billion
Dividend yield 2.9%
Stability dividend 0.99 from max. 1.0
Stability gain 0.90 of max. 1.0

Intel divides its business fields into the six segments “Data Center Group (DCG)”, “Internet of Things (IOTG)”, “Mobileye”, “Non-volatile Memory Solutions Group (NSG)”, “Programmable Solutions Group (PGS)” and “Client Computing Group (CCG)”.

Intel's sales development by segment

Intel’s sales development by segment (Source: FactSet Workstation)

The “Client Computing Group (CCG)” segment

By far the largest segment with a share of sales of 54 percent is the CCG segment. The segment includes the PC processors that have made Intel widely known over the past few decades. Intel sells CPUs for the desktop and notebook area. However, growth in recent years has been modest. In the last quarter, for example, it was only one percent, because from today’s perspective Intel has largely lost its technical lead over its eternal competitor AMD. We will go into this separately later.

The “Data Center Group (DCG)” segment

In the DCG segment Develops Intel chip solutions for computing, storage and network functions, which are sold to providers of cloud services, companies, authorities or communication service providers. The segment is responsible for 32 percent of total sales. After the segment has grown in the double-digit range on average in recent years, growth in 2019 was rather meager at two percent. In the last quarter, however, sales rose again by 7 percent.

The small segments “IOTG”, “Mobileye”, “NSG” and “PGS”

The four segments “IOTG“,” Mobileye“,” NSG“And” PGS“Are only responsible for a fraction of total sales. The largest segment is the segment for storage solutions NSG with a share of 6 percent of total sales.

The “Mobileye” segment is particularly exciting. With this, Intel is addressing the “autonomous driving” mega-market. The company got a foothold in this market with the USD 15.3 billion expensive takeover of the Israeli company of the same name. Intel’s market position is very strong thanks to Mobileye. At level 2 of autonomous driving, currently “state of the art”, 70 percent of all systems are based on Mobileye solutions. The share of Intel’s total sales is still very small at just one percent. After years of strong growth in 2017 to 2019, the segment also only grew by a weak 2 percent in the last quarter. It will therefore take a long time before the segment will be a solid pillar for the business, especially since the competition is very fierce. Tesla, Nvidia and, more recently, Qualcomm are among the greatest rivals.

Intel, where has your growth gone?

The segment description already indicated that Intel is currently missing a growth driver in its product portfolio. The consequence is falling sales for this and probably also the next financial year. Sales should not increase slightly again until 2022.

Intel's sales development in the share finder

Intel’s sales development in the share finder

Intel manufactures most of the chips in its own factories, which makes the company’s success dependent on competitive manufacturing technologies in-house. Competitor AMD, on the other hand, uses the large contract manufacturers Samsung and Taiwan Semiconductor and thus has access to the only manufacturers in the world who already master the 7nm (nm = nanometer) production standard. Intel, on the other hand, has major problems with the introduction of 7nm production and has had to postpone its market launch several times. Intel’s 10nm disaster the past, which even led to a market launch delayed by several years, threatens to repeat itself. Intel’s first shipments of 10nm-based Desktop CPUs are only planned for the second half of 2021.

As a result of the manufacturing problems The margins in chip production are falling and Intel is increasingly losing market share to the competition. AMD was able to take market share from Intel in three of four important sub-markets. At the same time, Intel’s weak phase, which lasts for several quarters, is increasingly giving the impression of a longer lasting trend which, in the worst case scenario, could lead to Intel losing dominance in the CPU area.

Intel vs AMD Market Shares

Intel vs. AMD market shares as of Q1 2020, source:

Intel suffered another setback in the production of 5G modems for the mobile phone market. The management had announced 5G modems on a large scale and in flowery words several times without ever delivering a single product to a customer. In 2019, Intel lost to Qualcomm admit and then withdrew from the future market.

In my opinion, Intel’s management has focused too much on maintaining the share price in recent years by investing massive amounts of money in share buybacks. Since 2007, the number of shares outstanding has fallen from almost 6 billion to currently 4.2 billion. The share buybacks increased earnings and dividends per share in the short term, but would have been better off in research and development in the long term.

Share buybacks and the impact on Intel's earnings in the share finder

Share buybacks and the impact on Intel’s earnings in the share finder

AMD shows that there is another way. Although the number of AMD shares outstanding has increased from 835 million in 2016 to currently over 1.21 billion, the Intel competitor’s share price also increased by more than 640 percent over the same period. The example of Intel shows that a supposedly shareholder-friendly management does not necessarily lead to a superior investment and that operational problems cannot be concealed in the long term by buying back shares.

How profitable is Intel still?

The current problems are affecting Intel’s profits and cash flows. Like sales, profit and cash flow will decline over the next few years before slowly increasing again from 2022. It will take a few years, however, before the old highs are reached again.

Profits and cash flows of the Intel share in the share finder

Profits and cash flows of the Intel share in the share finder

The development of the margins is also negative. The gross margin fell from 62 percent in 2017 to currently 56 percent. The operating and net margins are also expected to fall by one to two percentage points over the next two years.

Intel's margin development in the share finder

Intel’s margin development in the share finder

How Safe is the Intel Dividend?

The development of the Intel dividend is more gratifying than the operating business. Intel has increased its dividend every year for the past 6 years, but has been paying its shareholders a quarterly dividend since 1992, which Intel has increased from USD 0.06 in 2000 to USD 0.33. In the last three years the dividend has increased by 6.6 and in the last 10 years by an average of 8.45 percent. Following the recent increase from $ 0.315 to $ 0.33, shareholders will receive $ 1.32 per year. At the current price of USD 45, this corresponds to a dividend yield of 2.91 percent.

Due to the price losses in recent months, the dividend yield is approaching the upper end of the short-term corridor of one year and is on average over the last 10 years. There was a much higher dividend yield only in the years 2009 and 2012 to 2013.

Dividend history for Intel in the share finder

Dividend history for Intel in the share finder

However, the low payout ratio of 32.9 percent based on free cash flow and 25.4 percent based on reported profit leave enough room for further dividend increases. Despite all the acute problems, Intel has by far the most attractive dividend profile compared to its competitors. Qualcomm’s current dividend yield has melted to 1.74 percent due to the recent price hikes, while Nvidia’s current yield is just 0.13 percent. AMD, in turn, pays no dividends at all.

Is the Intel share fairly valued?

The dynamic stock valuation shows that the price losses of the past few months have pushed Intel shares deep into the undervaluation area. In purely mathematical terms, based on the fair adjusted profit, there is an upward potential of 17.1 percent by the end of 2021. A similarly high return expectation results if we look at the forecast profit development in the following year 2022. A clear 31.6 percent of the stock is missing by the time it reaches its fair value.

Fair value of the Intel share in the share finder

Fair value of the Intel share in the share finder

Despite all the problems, I am amazed that the market is trading Intel stock at a single-digit adjusted P / E ratio. The price-cash flow ratio of less than six also indicates a significant undervaluation. In comparison, AMD’s price-cash flow ratio is more than ten times. Intel’s currently poor run seems to me to be over-priced.

Conversely, there is currently little to suggest that we can hope for a quick improvement in operational business. Intel will presumably follow AMD’s successes in the next few years and presumably continue to lose market share. However, with Intel’s sales and profit development, you can clearly see that the operational business depends on the success of individual chip generations. Phases of growth alternate with years of stagnation. AMD is currently the clear leader in the market for CPUs. In the mid-2000s, however, the Primus got deeply into the red, which shows that no market share lasts forever. In our AMD analysis I wrote:

Bad management, making the wrong decisions, usually leads to worse upheavals in competitive technology than in other, more conservative industries. This does not only affect AMD, but the entire industry and is a risk that you have to bear with all investments in this area. For me personally, however, the current rating is too high in view of such a risk.

The European View

The example of Intel shows how bad management affects the chip industry. Long-term investors may see an opportunity in this situation. Intel can count among the winners again in the next cycle or the next. Until then, high dividends that continue to rise will compensate for the weak price development, while the already low valuation ensures a limited downside risk. A look at the balance sheet also shows that Intel’s situation is not threatening its existence. USD 70.7 billion in debt are compared to significantly higher assets, so that Intel’s debt ratio is only a modest 48 percent, which is only slightly above AMD’s debt ratio of 44.2 percent (although it is falling from quarter to quarter) and significantly below that of Qualcomm is at 82 percent. Only Nvidia has a significantly stronger balance sheet with a debt ratio of 30 percent.

Debt in total assets and repayment power in the share finder

Debt in total assets and repayment power in the share finder

More tech stocks for your portfolio

If you’re looking for more tech stocks, check out our other free stock research:

AMD share - shooting star or superstarNvidia - Buying Mr Market rationallyQualcomm stock analysisApple stock stock analysisTSMC share -Invest in the largest hardware company in the worldCisco share - price plunge! A buy with a 3.3 percent dividend

Conclusion: Intel share – battered, but far from knocked out

There is a reason for the decline in Intel shares. Severe disappointments in the area of ​​5G and 7nm production seem like the tip of an iceberg of current problems, which lead to weak competition and, as a result, to declining growth. And yet long-term investors still see Intel as a tech giant that is stumbling but still on strong feet. Should it find itself back to its old form, today’s price of the Intel share will in retrospect be a bargain price. You can put Intel and over 1,000 other dividend and tech stocks through their paces in Germany’s most popular stock finder – with unique and always up-to-date key figures at a low price.

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