Intel Corporation $INTC - A Valuation on 3rd July 2021
This mature semiconductor business has lost the Apple contract. After a substantial short-term hit, they will continue growing slowly and steadily.
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Intel Corporation designs and manufactures essential technology for the cloud, smart, and connected devices industries worldwide. The company was founded in 1968 and currently has its headquarters in Santa Clara, California. The company operates through six main segments:
Data Center Group — 33.75% of revenue — Developing workload-optimized platforms for computing, storage, and network functions. These include their cloud service providers, enterprise and government data centres, and communication service providers.
Internet of Things Group — 3.89% of revenue — Developing high-performance computing for retailers, manufacturers, healthcare, energy, auto, and government.
Mobileye — 1.25% of revenue — Driving assistance and automation with their Advanced Driver-Assistance Systems (ADAS) products.
Non-volatile Memory Solutions Group — 6.93% of revenue — Computer memory and storage products. Customers include enterprise and cloud-based data centres, business and consumer desktops and laptops.
Programmable Solutions Group — 2.4% of revenue — Programmable semiconductors for communications, data centres, industrial and military purposes.
Client Computing Group — 51.79% of revenue — Platform products and personal computing parts.
Intel is a US-based company that serves the global market. It gets 26% of revenue from China, 22.9% from Singapore, 21.3% from the United States, 14.9% from Taiwan, and 14.9% from other International markets.
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The Company
Market Cap = $226.69B
Total Debt = $35.88B
Cash & Equivalents = $22.40B
Enterprise Value = $238.66B
Shares Outstanding = 4.038B
EV/Sales (LTM) = 3.1x
Since Gordon Moore and Robert Noyce founded the company in 1968, Intel has grown to become the world’s largest semiconductor chip manufacturer by revenue. The name comes from a contraction of “Integrated Electronics”. The company was the first to develop S/DRAM memory chips, and these represented most of its business in the early years.
Through the 1990s, the company invested heavily in microprocessor design and helped to drive the rapid growth of the personal computer industry. Regrettably, for punters late to the party in ‘99/’00, investors had already bid the stock price up exponentially in the tech bubble. These late punters paid the price during the ensuing collapse and period of price stagnation.
After the tech bubble collapsed, growth in demand for microprocessors began to slow, and Intel’s competitors (most notably AMD) began to etch away at their previously dominant market share. An attempt by then CEO Craig Barrett to diversify the company’s business beyond semiconductors fell flat, and revenues stagnated for a few years.
Then, in 2005, Paul Otellini, then CEO, re-focused the company on their core processor and chipset business and signed a deal with Apple to provide the processors for Macintosh computers - a big win for Intel. Over the following 15 years, successful iterative improvements of the company’s technology and the continued rapid growth of Apple helped Intel grow.
Intel is a mature company with a dominant position, long-term stable margins, and slow structural growth.
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The Story
This mature semiconductor business has lost the Apple contract. After a substantial short-term hit, they will continue growing slowly and steadily, while their leading position and manufacturing capabilities will help them defend margins.
Growth: Intel has had an average CAGR of 5.7% since the mid-2000s. This growth has been broadly in line with market growth over this time and shouldn’t be a surprise given Intel’s dominant position, size and success of Apple products.
However, looking forward, given that Apple announced it is transitioning away from Intel processors to in-house ones, we think this will deliver an immediate hit to revenues. Analyst consensus is for an FY21 loss of revenue of 6.7%, and we believe this is about right.
Further, economists estimate that the global client computing market and cloud data centre markets will grow at 0.1% and 19.0% CAGR, respectively, over the medium term. Based on Intel’s segment weightings, this suggests ongoing medium-term market growth of 5.8%. Given the loss of the Apple contract and the fact that Intel has fallen behind on manufacturing, we think that medium-term growth is likely to be closer to the company’s fundamental growth rate of 2.45%.
Margins: Intel has had an average R&D adjusted operating margin of 28.68% over the last ten years. This margin is far above the industry (weighted by segment) average of 14.62% over that time. Over the TTM, the company’s margin was 29.91%.
Intel’s leading position in the microprocessor has helped them scale up and defend margins. The enormous R&D and capital investment required to extend manufacturing processes and capacity for new products act as a consistent call on capital. They have helped act as significant barriers to entry. Intel is now one of a handful of remaining semiconductor companies with the capacity to manufacture chips internally.
Given this position, we expect Intel to maintain its current average margins by either pushing higher costs through to customers or improving manufacturing processes.
Net Reinvestment: We expect Intel to remain an extremely capital intensive business (generating $0.61 of revenue per dollar of invested capital), especially compared to the industry ($1.71 of revenue per dollar of invested capital). Moreover, we expect their extraordinary R&D requirements, which have averaged $13.5B p.a. over the last five years, will not diminish.
FCF: But, given how profitable the business is, we expect it to remain highly FCF generative.
Cost of Capital: Intel is a semiconductor and electronics business (66.2%) and a cloud services business (33.8%) serving China (26%), Singapore (22.9%), the United States (21.3%), Taiwan (14.9%) and other international markets (14.9%).
The company has a 0.2x average operating leverage ratio and a 15.7% D/E ratio. Moody’s has assigned Intel an A1 credit rating, which is the same as our long-term synthetic rating but lower than our short-term rating of Aaa. We’ve gone with the former because we agree with Moody’s reasoning:
“Despite Intel's strong credit metrics, the rating is constrained by the relatively high operating and technology risk associated with leading-edge semiconductor design and manufacturing, and the volatility inherent to the semiconductor sector.”
— Moody’s Investors Services, 21 Sep 2020
Moreover, the A1 rating drives the low (1.08%) chance of distress.
Other Assets & Minority Claims: Intel has $17M worth (at book) of investments carried under the equity method, $6.8B of investments held at fair value, and no minority claims outstanding.
Debts & Other Claims: Finally, the company owes $35.6B NPV in debts and leases.
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The Valuation
The company reports in USD. Accordingly, we have valued it in USD.
Growth Rate: 2.45%
Stable Margins: 28.68%
Cost of Capital: 7.05%
Valuation Model Output:
Estimated Intrinsic Value/Share = $63.02
Monte-Carlo Simulation Intrinsic Value Percentiles:
90th = $88.50
75th = $77.78
50th = $65.87
25th = $53.97
10th = $43.25
Market Price & Rating
Market Price = $56.14
Estimated Value = $63.02
Price/Value (%) = 89.1%
Monte-Carlo Price Percentile = 29%
Likelihood Overvalued = 29%
Likelihood Undervalued = 71%
Rating At Current Price = HOLD/ADD
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Disclaimer:
This publication is not financial or legal advice. This research is an independent analysis.