Dear Followers&Copiers, A short note on $INTC (Intel) and the price reaction post its earnings release:
👉 Earnings were actually mixed to better than expected: EPS: $1.71, adjusted, versus $1.11 expected. Revenue: $18.1 billion, adjusted, versus $18.24 billion expected. Exp 4Q21 revs $18,3bn vs. $18,24bn exp
👉 The reasons for an 11% drop were actually twofold: a) a fall in its main business (client computing group) of 2% yoy due to chip shortages b) the message from the company that its gross margin and FCF will decline in the next 2-3 years, as it conducts a massive capex programme ($20bn this year only) to restructure its business and become a foundry Point b) here is crutial and it explains $INTC struggle to perform (in term of stock price action) as some other semiconductor companies do in recent years. Example 1yr rolling returns: $INTC +2,6%, $AMD (Advanced Micro Devices Inc) +46%, $NVDA (NVIDIA Corporation) +72%, $SWKS (Skyworks Solutions) +10%.
The clue is:
1. $INTC, as the market incumbent with biggest market share, undergoes a natural process of growing competition and margin erosion and as such is perceived by many investors a copmany that will genereally lose parts of its close to monopolistic position in the past.
2. The company overslept some crutial industry trends in the las 5 years or so and did not manage to stay ahead with both the quality of its chips and the production capacities on an extremely fast-growing market of semiconductors. Now $INTC has to close that gap, hence such massive capex plans. Still, for the coming foreseeable future, the rise of better-positioned competitors like $AMD is unthreatened, given their product quality (Rhyzen chips) and the lack of supply problems as in case of Intel.
3. So the pricing of semiconductor stocks, as all stocks actually, is now mostly driven by the very crutial value-creative factor, namely FCF growth. Let’s take a simple example: for the last 3 ended FYs the average FCF growth for $AMD was +174,5%, whilst for $INTC it was +28%. If you take a simple Gordon Growth model: Px=FCFE1/(Ke-g) – you can see directly that a higher g (growth) makes the denominator of this equasion smaller, read makes the estimated Px of a company higher.
𝑪𝒐𝒏𝒄𝒍𝒖𝒔𝒊𝒐𝒏: 🤔 As long as $INTC does not manage to change its perception as “the old biggest” semiconductor company and catch up with its business growth to main competitors, its stock price will struggle to perform very well on a relative basis. Of course, for all the above reasons, current valution of Intel makes it a Value stocks, rather than a Growth stock. It trades at an attractive 13x NTM normalized PE, whilst others trade much much higher ($AMD 45x, $NVDA 55x, etc). It yields a dividend of 2,5%ish, whilst competitors don’t. All the above stocks are in my Global Leaders Portfolio with $INTC being underweight vs. $AMD and $NVDA currently for the reasons described above. I do keep exposure to Intel though to lower the general semiconductor space Beta and add value characteristics.
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