Intel Corporation Stock Valuation


Ticker:                          INTCNature of Business:    Technology ServicesLocation :                               USA
Recent Price:           $34.2252-Week High/Low: $56.28/33.60Estimated Fair Value:         $55.20-$71.53
Expected Return:    53.0%Consider Buy:                     Below $63.37Business Risk:                     High
Financial Risk:      MediumEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Intel Corporation (INTEL) is a semiconductor manufacturing company founded in 1968. INTEL has been transformed from a producer of personal computer (PC) components into a technology company offering products that can power artificial intelligence (AI), 5G network, cloud computing and autonomous driving. The company was manufacturing microcomputer components and related products such as microprocessors, memory chips, computer modules, computer boards, network products, communication products and personal conferencing products. It now produces wifi products, server products, ethernet products, chipsets and processors for PCs, data centres and workstations.

INTEL is using cutting-edge technology to develop innovative semiconductor and software products. It also invests in future technologies aimed at powering the digital economy. The company has made some acquisitions to widen its AI product portfolio. 

Patrick Gelsinger, the first technology officer of INTEL,  returned to the company in February 2021 as chief executive officer. Lip-Bu Tan has been elected to join the board on 1st  September 2022. Tan is expected to bring his experience in venture capital and the technology industry to bear on the board. 

Investment Thesis
Even though its performance was not very impressive in the 2021 fiscal year, INTEL is being refocused to take advantage of the opportunities provided by digital technology. It is investing in semiconductor manufacturing capacity and technology in order to meet the hardware and software needs of 5G network infrastructure, artificial intelligence, cloud computing, gaming, autonomous driving and data centres. It has decided to exit the smartphone modem and Home Gateway Platform businesses. In addition,  the first phase of the sale of its memory business to SK Hynix, a South Korean semiconductor company, has been completed. 

The bulk of INTEL’s earnings comes from two business segments, namely Client Computing Group (CCG) and Data Centre Group (DCG). The CCG sells personal computer processors and provides platforms to help manufacturers design and manufacture laptops to meet certain standards such as battery performance, responsiveness and connectivity. The DCG develops platforms for computing, storage and networking for clients like cloud service providers, communications services providers and governments. DCG has produced an operating profit margin that averaged out to 43.8% over the past nine years while CCG’s  9-year average operating profit margin was 33.8%. In addition, DCG’s revenue has grown at a 7-Year Compound Annual Growth Rate (CAGR) of 8.7% even though there was a slight year-over-year fall in the 2021 fiscal year. We believe that increasing demand for cloud computing, data centres and artificial intelligence would propel top line and bottom line growth of DCG going forward.  We also expect demand for personal computers to continue to drive the sale of platforms and processors from the CCG business segment of INTEL.

The Internet of Things Group’s compute platforms are being patronised by governments, researchers,  manufacturers, retailers, educational providers, health and life sciences providers for their technology needs. We expect investment in manufacturing capacity expansion to create cost savings due to large-scale production. This is expected to increase the availability of its products and improve the company’s profit margins going forward. 

A share of INTEL has a fair value ranging from $55.20 to $71.53 per share. The stock is currently trading below its estimate. Therefore, we believe it is undervalued. A return of 53% is expected on the company's shares. 

Financial Overview
The total revenue of INTEL increased by 1.5% year-over-year to $79 billion in 2021 compared to an 8.2% rise in the previous fiscal year. This was due to sluggish growth of 1.1%  in its CCG sales revenue and a 1.1% decline in its DCG sales. CCG and DCG produce over 80% of the company’s revenue. The CCG, which provides products for use in PCs, has consistently grown its sales revenue for 6 straight years. It produced revenue of $40.5 billion or 51.3% of total revenue in 2021 compared to the prior year when revenue was $40.1 billion or 51.4% of total revenue. 

A higher rise in costs resulted in a 17.8% drop in operating income to $19.5 billion in 2021. Operating profit margin, as a result, lost 5.8% to close at 24.6% at 2021 year-end. DCG witnessed a huge drop of 33.8% year-over-year in operating income to $7 billion. CCG,  which accounted for 75.4% of total operating income, shed only 3 percentage points to $14.7 billion in 2021. DCG, which has a better operating profit margin than CCG, dropped 13.4% in operating profit margin to 27.1%. CCG’s operating profit margin declined at a marginal rate of 1.6%  over the previous year. CCG’s operating profit margin of 36.2% surpassed its 9-year average by 2.5 percentage points.

Internet of things (IOT) platforms products sales recovered from a dip recorded a year earlier; it produced sales revenue of $4 billion in 2021, a 33% improvement over the revenue in the prior year. Besides, this segment made an operating income of $1 billion which was equivalent to a 26.1% operating profit margin.

Income Before Tax shed $3.4 billion or 13.5% to $21.7 billion at 2021 year-end. Income After Tax, likewise, moved down from $20.9 billion in 2020 to $19.9 billion in 2021. Profit Before Tax (PBT) margin and Profit After Tax (PAT) margin were 27.5% and 25.1% respectively having lost 4.7% and 1.7% year-over-year. Debt rose 4.7% to $38.1 billion from $36.4 billion declared in the prior year. 

Business Risk
INTEL makes significant investments in innovative manufacturing processes, product improvements and future technologies. These have serious cost implications and carry some risks as these technologies are still developing. The company is also susceptible to downward pressure on profit margins due to industry competition and huge spending on research and development. 

Recommendation: Buy

Earnings Chart of Intel Corporation

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