Thematic evaluation
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Intel Corp. (INTC)

October 16, 2024

Compared to: NVIDIA Corp. (NVDA) | Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Intel appears moderately undervalued due to its current low valuation multiples relative to historical averages and peers, despite facing significant challenges. The potential for successful execution of strategic initiatives, particularly the Intel 18A launch and AI PC market growth, offers substantial upside that may not be fully reflected in the current stock price.

Key takeaways
  • Intel is facing significant challenges in a highly competitive semiconductor industry, with declining revenue, profitability, and asset utilization efficiency.
  • The company is taking aggressive actions to reduce spending and improve financial sustainability, but its future outlook remains uncertain.
  • Intel's valuation is currently depressed, reflecting its weak financial performance and higher risk profile.
  • The company's growth opportunities are tied to its ability to execute on its IDM 2.0 strategy, return to process leadership, and capitalize on the growth of the AI PC category.
  • Investors should carefully consider the risks and threats facing Intel, including competition, technological change, supply chain disruptions, and macroeconomic uncertainty.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Intel is a global semiconductor company that designs, develops, manufactures, and sells CPUs and related solutions for a wide range of computing and communications applications.
    • The company's key products include microprocessors, chipsets, SoCs, and multichip packages based on Intel architecture, as well as programmable semiconductors, FPGAs, and accelerators.
    • Intel's major customers include OEMs, ODMs, cloud service providers, and other manufacturers/service providers across client computing, data center, network, and edge markets.
    • The company's key competitors include AMD, Qualcomm, NVIDIA, Apple, and other semiconductor companies offering competing CPU, GPU, and accelerator products.
    • We are using the Technology Select Sector SPDR Fund (XLK) as a benchmark for Intel's price performance and NVIDIA Corp. (NVDA) and Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) as industry peers for comparative analysis.

  2. Financial Performance:

    • Intel's revenue has been declining in recent quarters, driven by lower demand across client, data center, and network/edge segments.
    • The company's profitability has been pressured by lower revenue, increased costs, and manufacturing inefficiencies.
    • Intel's gross margin has been declining, reaching 38.7% in Q2 2024, significantly below expectations.
    • The company's net income has been volatile, with a significant loss in Q2 2024.
    • Intel's ROA, ROE, and ROIC have been declining in recent quarters, indicating a decrease in asset utilization efficiency.
    • Compared to its peers, Intel has significantly underperformed in terms of revenue growth, profitability, and return on assets.

  3. Operational Efficiency:

    • Intel's working capital has been increasing in recent quarters, indicating potential inefficiencies in managing inventory and receivables.
    • The company's cash flows have been declining, driven by lower demand and increased capital expenditures.
    • Intel's free cash flow has been decreasing, with a negative free cash flow margin in recent quarters.
    • The company's capital expenditures have been high, driven by investments in its IDM 2.0 strategy and advanced process technology roadmap.
    • Intel's dividend has been suspended to prioritize liquidity and support its long-term strategy.
    • The company's current ratio and quick ratio have been above 1, indicating a strong short-term liquidity position.
    • Intel's debt-to-equity ratio has been increasing, indicating an increase in financial leverage.
    • Compared to its peers, Intel has a lower current ratio and a higher debt-to-equity ratio, indicating a weaker short-term liquidity position and higher financial leverage.

  4. Growth Opportunities:

    • Intel is focused on returning to process leadership, with the launch of Intel 18A expected in the first half of 2025.
    • The company is targeting the AI PC category, which it expects to grow from less than 10% of the market today to over 50% by 2026.
    • Intel is expanding its foundry business, with increased wafer volume on Intel 7 and the company's first EUV nodes.
    • The company is transitioning to a more normal cadence of node development, which should have positive implications for R&D and capital spending.
    • Intel is taking aggressive actions to reduce spending by over $10 billion in 2025, including a headcount reduction of more than 15%, to improve financial sustainability.
    • The company's capital allocation strategy is shifting towards investment over returns to shareholders in the near-term to position itself for long-term growth.

  5. Risks and Threats:

    • Intel faces high competition and rapid technological change in the semiconductor industry.
    • The company's significant long-term investments in R&D and manufacturing may not realize favorable returns.
    • Intel relies on a complex global supply chain subject to disruptions, delays, and shortages.
    • The company faces potential security vulnerabilities and cybersecurity threats.
    • Intel is subject to intellectual property litigation and regulatory risks.
    • Macroeconomic conditions and geopolitical tensions can impact demand, operations, and access to capital.

  6. Valuation Analysis:

    • Intel's valuation metrics, such as P/E and EV/EBITDA, have been declining in recent quarters, reflecting the company's weak financial performance.
    • Compared to its peers, Intel is trading at a lower valuation, reflecting its underperformance and higher risk profile.
    • Potential catalysts for Intel's valuation include the launch of Intel 18A, the growth of the AI PC category, and the expansion of the foundry business.

  7. Price Performance:

    • Intel's stock price has significantly underperformed its benchmark, XLK, and its peers, NVDA and TSM, over the past three years.
    • The company's stock price has been volatile, with significant drawdowns in Q1 2024 and Q2 2024.
    • Intel's beta value suggests that it is more volatile than the overall market, indicating a higher risk profile.

  8. Future Outlook:

    • Intel's management team expects a slower-than-expected recovery, with below-seasonal revenue growth in Q3 2024 and a return to the high end of the normal seasonal range in Q4 2024.
    • The company expects to drive approximately $1 billion in savings in non-variable cost of sales in 2025.
    • Analyst estimates for Intel's revenue and earnings growth are mixed, with some analysts expecting a rebound in 2025 and others remaining cautious.

  9. Summary:

    • Intel is facing significant challenges in a highly competitive semiconductor industry, with declining revenue, profitability, and asset utilization efficiency.
    • The company is taking aggressive actions to reduce spending and improve financial sustainability, but its future outlook remains uncertain.
    • Intel's valuation is currently depressed, reflecting its weak financial performance and higher risk profile.
    • The company's growth opportunities are tied to its ability to execute on its IDM 2.0 strategy, return to process leadership, and capitalize on the growth of the AI PC category.
    • Investors should carefully consider the risks and threats facing Intel, including competition, technological change, supply chain disruptions, and macroeconomic uncertainty.
    • Intel's future performance will depend on its ability to improve its operational efficiency, manage its capital expenditures effectively, and execute on its strategic initiatives.
Peer fundamentals 
Fundamentals
Insights
  • Intel is navigating a highly competitive semiconductor industry with rapid technological change, complex global supply chains, and significant geopolitical and macroeconomic risks.
  • The company is executing on its IDM 2.0 strategy to strengthen its manufacturing capabilities and foundry business, but faces challenges in developing and ramping advanced process nodes and new products.
  • Legal and regulatory risks, particularly around intellectual property disputes and antitrust allegations, pose material threats to Intel's financial performance and operations.
  • Intel's financial results have declined recently due to lower demand across its major end markets, putting pressure on margins and profitability despite ongoing investments.
  • The company is prioritizing liquidity and capital allocation towards capacity expansion and technology development over shareholder returns in the near-term to position itself for long-term growth.
  • The company is focused on returning to process leadership, with the launch of Intel 18A expected in the first half of 2025, which should unlock further growth and value creation.
  • The AI PC category is a key strategic focus, with the company expecting it to grow from less than 10% of the market today to over 50% by 2026.
  • Intel's management team expressed confidence in the company's long-term strategy and the actions being taken to improve financial performance, despite the near-term challenges.
Analysis

  • Revenue - Revenue growth is decreasing due to lower demand across client, data center, and network/edge segments. - The company is facing industry-wide conditions, including weaker spending across consumer and enterprise markets, especially in China. - The company is focused on returning to process leadership, with the launch of Intel 18A expected in the first half of 2025, which should unlock further growth and value creation. - The AI PC category is a key strategic focus, with the company expecting it to grow from less than 10% of the market today to over 50% by 2026.

    • Profitability

      • Profitability is decreasing due to lower revenue, increased costs, and manufacturing inefficiencies.
      • The company is taking aggressive actions to reduce spending by over $10 billion in 2025, including a headcount reduction of more than 15%, to improve financial sustainability.
      • The company is focused on returning to process leadership, with the launch of Intel 18A expected in the first half of 2025, which should unlock further growth and value creation.
      • The company's profitability is significantly higher than the industry average, but is decreasing.

    • Liquidity

      • The company's liquidity position is strong, as evidenced by the increasing cash & short-term investments and the current ratio and quick ratio being above 1.
      • The company's liquidity position is significantly lower than the industry average.

    • Solvency

      • The company's financial leverage is increasing, as evidenced by the increasing total debt and the decreasing total debt to total equity ratio.
      • The company's long-term solvency is strong, as evidenced by the increasing free cash flow generation and the decreasing debt obligations.
      • The company's financial leverage is significantly lower than the industry average.

    • Operational Efficiency

      • The company's asset utilization efficiency is decreasing, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.

    • Cash Flow Analysis

      • The company's cash flows are decreasing due to lower demand across client, data center, and network/edge segments.
      • The company is focused on returning to process leadership, with the launch of Intel 18A expected in the first half of 2025, which is driving the decrease in capital expenditures.
      • The company is taking aggressive actions to reduce spending by over $10 billion in 2025, including a headcount reduction of more than 15%, which is driving the decrease in financing cash flow.
      • The company's cash flows are significantly higher than the industry average, but are decreasing.

    • Risk Factors

      • The company is facing industry-wide conditions, including weaker spending across consumer and enterprise markets, especially in China.
      • The company is navigating a highly competitive semiconductor industry with rapid technological change, complex global supply chains, and significant geopolitical and macroeconomic risks.
      • The company is executing on its IDM 2.0 strategy to strengthen its manufacturing capabilities and foundry business, but faces challenges in developing and ramping advanced process nodes and new products.
      • Legal and regulatory risks, particularly around intellectual property disputes and antitrust allegations, pose material threats to Intel's financial performance and operations.

    • Future Outlook

      • The company's future cash flows are expected to improve, as evidenced by the increasing free cash flow margin.
      • The company's future free cash flow is expected to be sufficient to support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
      • The company's revenue growth is expected to be below-seasonal in Q3 and return to the high end of the normal seasonal range in Q4.
      • Profitability margins are expected to improve in the future.
      • The company's balance sheet is expected to continue to grow in the future, as evidenced by the increasing cash & short-term investments and the increasing total equity.
      • The company's liquidity position is expected to remain strong, as evidenced by the increasing current ratio and quick ratio.
      • The company's long-term solvency is expected to remain strong, as evidenced by the increasing total equity and the decreasing total debt to total equity ratio.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-15)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison:
    • INTC has significantly underperformed XLK over all periods, with particularly large underperformance in the 1-year, 2-year, and 3-year periods. This suggests that INTC has struggled to keep pace with the broader technology sector.
    • INTC's performance has been inconsistent relative to XLK, with periods of outperformance in the short term (e.g., 1 month) but consistently underperforming in the longer term.
  • Risk and Return Analysis:
    • INTC has provided lower annualized returns than XLK over all periods, indicating that it has not been as profitable as the broader technology sector.
    • INTC has exhibited higher annualized volatility than XLK, indicating that it has been more susceptible to price fluctuations.
    • INTC has experienced significantly larger maximum drawdowns than XLK, with a maximum drawdown of 69.57% in Q1 2024, compared to XLK's maximum drawdown of 16.97% in Q2 2024. This indicates that INTC carries a higher risk profile than XLK, with a greater potential for substantial price declines.
  • Risk-Adjusted Performance:
    • INTC has consistently offered a lower Sharpe ratio than XLK, indicating that it has not been as efficient in generating risk-adjusted returns.
    • INTC's beta values consistently above 1 indicate that it is more sensitive to market movements than the overall market, further highlighting its higher risk profile.
  • Overall Assessment:
    • INTC has underperformed XLK in terms of both absolute and risk-adjusted returns, with a higher risk profile as evidenced by its higher volatility and larger drawdowns.
    • INTC's recent performance has been particularly weak, with significant drawdowns and volatility in Q1 2024 and Q2 2024.
    • While INTC's beta has been slightly higher than XLK's in recent quarters, suggesting a slightly higher sensitivity to market movements, the overall trend suggests that INTC's risk profile is similar to the broader technology sector.
    • Investors considering INTC should carefully weigh its lower returns and higher risk profile against its potential for growth and profitability.
Peers Price History(as of 2024-10-15)
NVIDIA Corp. (NVDA)Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)
  • Performance Comparison:
    • INTC has significantly underperformed its peers, NVDA and TSM, over the past three years. This underperformance has been consistent across all time periods, with INTC experiencing much larger declines in value compared to its peers.
    • INTC's performance has been particularly weak in the past two years, with annualized returns of -5.05% compared to NVDA's 232.87% and TSM's 72.22%. This suggests that INTC has struggled to keep up with the growth of its peers in the semiconductor industry.
  • Risk and Return Analysis:
    • INTC has provided significantly lower returns than its peers, NVDA and TSM, over the past three years. This is evident in both the annualized returns and the historical performance data.
    • INTC has generally been less volatile than its peers, NVDA and TSM, but it has experienced periods of high volatility, particularly in Q4 2022 and Q2 2024. This suggests that INTC's stock price has been less susceptible to sudden and large fluctuations compared to its peers, but it is not immune to volatility.
    • INTC has experienced the largest maximum drawdown of 69.41% on 08/07/2024, compared to NVDA's maximum drawdown of 66.34% on 10/14/2022 and TSM's maximum drawdown of 54.34% on 10/11/2022. This indicates that INTC's stock price has been more susceptible to significant declines than its peers, despite its lower overall volatility.
  • Risk-Adjusted Performance:
    • NVDA has consistently offered a better risk-adjusted return than INTC and TSM, as evidenced by its higher Sharpe ratio. This suggests that NVDA has been able to generate higher returns for the level of risk taken.
    • INTC's beta value suggests that it is more volatile than the overall market, indicating a higher risk profile. NVDA's higher beta value suggests an even higher risk profile. TSM's beta value suggests a slightly higher risk profile than the market.
  • Overall Assessment:
    • INTC has significantly underperformed its peers, NVDA and TSM, over the past three years, both in terms of absolute returns and risk-adjusted returns. This underperformance can be attributed to several factors, including the company's struggle to compete in the rapidly evolving semiconductor industry, particularly in the areas of high-performance computing and artificial intelligence.
    • INTC's lower volatility compared to its peers suggests that its stock price has been less susceptible to sudden and large fluctuations. However, its larger maximum drawdown indicates that it is not immune to significant declines.
    • INTC's lower Sharpe ratio and higher beta value suggest that it has not been able to generate as much return for the level of risk taken compared to its peers. This suggests that investors may be better off investing in NVDA or TSM, which have consistently offered better risk-adjusted returns.
    • INTC's recent trends suggest that its volatility and drawdowns have been increasing, which could be attributed to the ongoing semiconductor industry competition, market uncertainty, and the company's efforts to regain market share. However, its performance remains weak compared to its peers.
    • Overall, INTC's performance, risk profile, and risk-adjusted returns have been significantly weaker than its peers, NVDA and TSM, over the past three years. This suggests that investors may want to consider other investment opportunities in the semiconductor industry.
Peers Fundamentals(as of 2024-06-30)
NVIDIA Corp. (NVDA)Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)

  1. Market Position and Size:

    • INTC is a significantly smaller player in the semiconductor industry compared to its peers, NVDA and TSM, with a market cap over 33 times smaller than NVDA and over 10 times smaller than TSM.
    • Despite its smaller size, INTC is still a large company with a substantial market presence, but its smaller size relative to its peers suggests that it may face challenges in competing with them in terms of innovation, market share, and profitability.

  2. Profitability and Efficiency:

    • INTC's profitability metrics are significantly lower than its peers and the industry average, despite its large size and revenue. This suggests that INTC may be facing challenges in managing its costs and generating profits.
    • INTC's efficiency in generating returns is significantly lower than its peers and the industry average, despite its large size and market position. This suggests that INTC may be facing challenges in effectively utilizing its assets and capital to generate profits.

  3. Financial Health and Stability:

    • INTC's liquidity position is relatively strong, but its debt levels are significantly higher than its peers and the industry average, despite its large market cap. This suggests that INTC may be facing challenges in managing its debt burden and could be at risk of financial distress if its profitability does not improve.

  4. Valuation and Market Perception:

    • INTC's valuation is significantly lower than its peers and the industry average, despite its large market cap. This suggests that the market is not optimistic about INTC's future prospects and is discounting its value.

  5. Cash Flow and Capital Management:

    • INTC's cash flow generation strength is significantly lower than its peers, considering their market caps. This suggests that INTC may be facing challenges in generating cash flow from its operations and may be struggling to invest in its future growth.

  6. Growth and Future Prospects:

    • INTC's growth metrics are consistently lower than the peer group average across most metrics, with significant year-to-year fluctuations. This suggests that INTC may be struggling to keep up with the rapid pace of innovation and growth in the semiconductor industry.
    • INTC's growth is concentrated in specific areas, such as total assets and book value per share, while other metrics, such as sales, EBITDA, and net income, have been consistently declining. This suggests that INTC may be investing in its assets and operations, but it is not translating into revenue growth or profitability.

  7. Potential for Investment:

    • INTC's investment attractiveness is relatively low compared to its peer group and industry. Its lower profitability, slower growth, and high debt levels pose significant risks to investors. While INTC has a strong liquidity position and a diversified business, these strengths are outweighed by its weaknesses.

  8. Key Risks and Considerations:

    • INTC's low profitability and slow growth are significant risks for investors.
    • INTC's high debt levels pose a risk to its financial stability.
    • INTC's inability to keep up with the rapid pace of innovation in the semiconductor industry could further erode its market share and profitability.

  9. Overall Assessment:

    • INTC's overall financial position is relatively weak compared to its peer group and industry averages. While INTC has a strong liquidity position, its profitability, efficiency, and growth are significantly lower than its peers. Additionally, INTC's high debt levels pose a significant risk to its financial stability.
    • INTC's competitive position within its peer group and the broader industry is relatively weak. Its smaller market cap, lower profitability, and slower growth compared to its peers suggest that it is struggling to keep up with the rapid pace of innovation and growth in the semiconductor industry.
    • INTC's investment attractiveness is relatively low compared to its peer group and industry. Its lower profitability, slower growth, and high debt levels pose significant risks to investors. While INTC has a strong liquidity position and a diversified business, these strengths are outweighed by its weaknesses.