Intel Corp (INTC) is a stock that I’ve followed for quite some time, and that I’ve written about in this space periodically for quite a while. This is one of the 600-lb gorillas of the Technology sector, after all, and the company that is easily considered the gold standard of companies in the Semiconductor industry. That said, the stock mostly underperformed the rest of the Tech sector as well as the Semiconductor industry in 2020 and for most of this year, as analysts and investors shared concerns about lost market share in the CPU space, especially in servers, to AMD along with increasing uncertainty about the path ahead for INTC’s 7nm production.
Despite a strong fundamental profile that has included a healthy balance sheet, increasing Free Cash Flow, and strong liquidity throughout the past year, those issues were apparently enough to prompt a change in executive leadership at the beginning of this year, with Pat Gelsinger, a long-time Intel employee before leaving in 2009 to lead VMWare, taking over for Bob Swan. Since that change in leadership was announced, the stock surged to an April peak at around $68.60 before falling back in May to a support level at around $53. From that pint, the stock stabilized and began to consolidate in a range between $58 and $55 – until the stock’s most recent earnings announcement, which saw the stock drop about $6 overnight. In the week since, the stock’s bearish momentum has pushed the stock down to about $48 – a level the stock last saw in the last month of 2020.
The irony is that the company’s latest earnings report shows that the fundamental strengths I just outlined still exist; perhaps the disconnect comes from Mr. Gelsinger’s deliberate method to unraveling 7 nm production problems. In March, the company announced it would invest $20 billion to create Intel Foundry Services, a major expansion of Intel’s manufacturing capacity that starts by building two factories in Arizona with an intention to become a major global provider of semiconductor foundry capacity in the U.S. and Europe. The move looks like a great opportunity to benefit from a global desire for non-Asian capacity – but the long-term reality of this project seems to have been at least one reason that the market has pushed the stock so far below its previous consolidation range.
Questions remain, of course about how quickly enterprise spending on IT infrastructure will rebound as the year progresses; this is a side of INTC’s business that held progress back in 2020 as businesses were forced to shift to work from home models that de-emphasized spending on traditional IT purchases. AMD’s capture of a big piece of that market at INTC’s expense has also shown an impact as well and is another reason a lot of analysts have turned more bearish about INTC for the time being. From my perspective, the real question at this point is whether the company’s underlying fundamental strength, and new management’s efforts to reinvigorate INTC’s historical emphasis on innovation and internal production efficiency still combine to give value investors a reason to stay bullish about the stock’s long-term prospects. Let’s dive in.
Fundamental and Value Profile
Intel Corporation is engaged in designing and manufacturing products and technologies, such as the cloud. The Company’s segments are Client Computing Group (CCG), Data Center Group (DCG), Internet of Things Group (IOTG), Non-Volatile Memory Solutions Group (NSG), Intel Security Group (ISecG), Programmable Solutions Group (PSG), All Other and New Technology Group (NTG). It delivers computer, networking and communications platforms to a set of customers, including original equipment manufacturers (OEMs), original design manufacturers (ODMs), cloud and communications service providers, as well as industrial, communications and automotive equipment manufacturers. It offers platforms to integrate various components and technologies, including a microprocessor and chipset, a stand-alone System-on-Chip (SoC), or a multichip package. The CCG operating segment includes platforms that integrates in notebook, two in one systems, desktop computers for consumers and businesses, tablets, and phones. INTC’s current market cap is about $195.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings were up 54% while sales increased by 4.69%. In the last quarter, earnings were about 33.6% higher, while sales declined by -2.24%. INTC operates with a robust margin profile that strengthened in the last quarter; Net Income versus Revenues over the past year was almost 27%, and grew in the last quarter to 35.55%. This is a measurement that has reflected some of the internal difficulties they have dealt with, along with the impact of COVID and competition-driven declines in its data center business in prior quarters, which means the turn to a positive pattern is a solid sign of strength.
Free Cash Flow: INTC’s free cash flow is healthy; in the last quarter, it came in at $17.3 billion, which is a decline from the $19.2 billion two quarters ago, but an improvement from $16.33 billion in the last quarter. The current number translates to a Free Cash Flow Yield of about 8.92%. The drop over the last six months is a concern, but the size of the actual number is also a reflection of the company’s operating strength, which should serve it well even if broad economic uncertainty and concern about its data center business continues, and also give the company the resources it needs to build its new foundry business.
Debt to Equity: INTC has a debt/equity ratio of .40. This is a conservative number. The company’s balance sheet indicates that operating profits are adequate to service their debt, with $34.6 billion in cash and liquid assets (a big increase from $24.8 billion in the previous quarter) versus $35.6 billion in long-term debt. With a healthy operating margin profile along with a sizable cash position, servicing their debt isn’t a problem.
Dividend: INTC pays an annual dividend of $1.39 per share, which translates to a yield of 2.89% at the stock’s current price. It should also be noted that management raised the dividend at the beginning of the year from $1.32 per share – which I consider an additional indication of fundamental strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $59 per share. That means that at its current price, INTC is trading at a 23% discount right now.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity for INTC. The red diagonal line traces the stock’s upward trend from a low last year at around $43.60 to a high at $68.50 per share in April. it also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock seemed to have found a bottom in May at around $53, the stock rallied to a short-term high at around $58, but after last week’s earnings report, the market pushed the stock out of that range overnight, with the stock sliding back to its current level at around $48. Current support could be anywhere between the stock’s current price and $46.50, where the 88.6% retracement line sits, with immediate resistance expected at around $51. A push above $51 should have additional near-term upside to about $53 where the 50% retracement line is waiting, while a drop below $46.50 should find next support around the stock’s 52-week low around $43.50.
Near-term Keys: INTC’s overall fundamental strength remains very healthy; the stock’s drop out of its consolidation improves the value proposition, but also increases the risk the stock could slide even further. I think that, value standpoint, the smart thing is to wait to see the stock find a new stabilization level before thinking about taking a long-term position. If you prefer to focus on short-term trading strategies, a push above $51 could provide a good bullish signal to buy the stock or work with call options, using $53 as an attractive, near-term profit target. If the stock drops below $46.50, you could also consider shorting the stock or buying put options, with the stock’s one-year low at around $43.60 offering a practical short-term target on a bearish trade.