Thesis summary
The tech sector has seen an incredible rally since the market came down in March. This has led many investors to compare with the dotcom bubble of 1999. Ratings are certainly scathing, and investors are cautious. However, one tech stock stands out to me as both a growth potential and a very reasonable valuation; Intel Corporation (INTC).
This company combines the potential growth of the technology sector with the reliability of more traditional revenue streams at a very attractive rating. Intel’s new offerings could potentially set it apart from other chipmakers, which could lead to double digits in the next 3-5 years.
Source: thestreet.com
Last quarter
In the last few days, Intel’s stock has fallen by about 20%. This is largely due to the release of the latest quarterly results, which presented a surprising announcement that Intel’s latest 7mm chips would not hit the market until 2021, a full 12 months later than planned. The results for the quarter in and of themselves were better than expected:
Source: 10-Q
Overall, net income has increased by more than 20% in the last 6 months. The increase is even greater, as measured by EPS, which has grown by 39% compared to the first two quarters of 2019.
In terms of balance sheet, the company remains as strong as ever. While the company has increased its debt tax over the years, the D / E sits at a safe 0.4, and the current ratio is around 2.
Despite not having that small backlog of 7mm chips, I believe Intel is still in a strong position, and seeing the rating, I appreciate it a very strong buy. Let me work out.
What’s next for Intel?
The question we need to answer is what is in store for Intel? Looking at the current share price today, Intel seems like price for a worst case scenario. Despite reaching near-double-digit growth for the past three years, Intel only has a P / E of around 8, making it seem as if investors do not believe the growth can continue.
As can be seen from the latest quarterly data, Intel’s business is still growing, and fast.
Source: 10-Q
If we look at the segment break, we can see that most of Intel’s revenue comes from its Memory solutions, most specifically the “Platform” subsegment. There is no reason to believe that Intel will not continue to grow in this department. Demand for memory will only grow over time. Intel is a best-in-class business solutions provider in this division.
The same analysis could be made with their Data segment. Intel has achieved rapid growth of more than 30%. How can Intel manage this? The answer is simple, despite all the buzz around other chipmakers like Advanced Micro Devices (AMD) and NVIDIA Corporation (NVDA), Intel offers the best in terms of value and efficiency when it comes to chips. Intel’s chips are not only cheaper but also more powerful in some cases. As for that, although investors are waiting for the 7nm chip version, they can still look forward to the release of Intel’s 11th Gen Tiger Lake chips.
The bottom line is, as I discussed in my previous article on Intel, that the company has reinvented itself over the last 5 years. This is reflected in their products and the much higher growth rates that the company has enjoyed. Intel is positioned as one of the biggest players in the semiconductor sector. Even if Intel fell behind the competition, the tailwinds of 5G, the Internet of Things, and Artificial Intelligence will ensure that the company continues to enjoy high demand for its products.
Similar rating
Even though Intel has consistently delivered the last 3 years, the rating does not reflect it at all. The last road in the share price simply represents an even greater opportunity to buy a company with heavy discounts. In the table above, we look at some of the rating ratios for Intel and its peers:
|
INTC |
AMD |
NVDA |
CSCO |
|
|
P / E GAAP (NYSE: TTM) |
9.04 |
160.82 |
85.56 |
19.07 |
|
Price / Cash Flow (TTM) |
5.52 |
113.57 |
56.87 |
13.05 |
|
PEG GAAP (TTM) |
0.34 |
0.87 |
89.15 |
– |
|
Deliver FCF Margin |
21.30% |
7.56% |
27.11% |
23.82% |
|
Proceeds on equity |
30.15% |
23.40% |
29.11% |
29.74% |
Data Source: Seeking Alpha
Above, we can see a comparison of Intel with its peers; AMD, NVDA, and Cisco Systems (CSCO). By any valuation measure, Intel is underpriced compared to its peers. The hottest thing for me is the fact that Intel is trading at only a 0.34 PEG ratio. Investor Peter Lynch made the point that an appropriately valued company should have a PEG of about 1, although nowadays most large tech companies are far above that. Furthermore, Intel not only offers a great way to gain exposure for technology, but it also provides a reliable source of revenue. Much like CSCO, the company pays a reasonable dividend of about 2.6%, which is more than covered by its operations.
While investors are certainly trying to invest in the FAANG companies, Intel is not going anywhere. The FAANG club now deals with ridiculous valuations, with P / Es in the 30 range. Even though they were great companies, at this point for the most part it just doesn’t make sense to throw more money from a value perspective into them.
Take away
Intel is one of the most undervalued stocks of blue chip out there. It has the potential to be so much more, and it has already shown in the last few years that it can deliver. With a P / E of 9, it is the most undervalued stock in the sector. Once investors realize this, we could easily expand the multiple, and I fully expect that the share price could more than double within the next two years. The last dip simply adds to the appeal of this investment.
Announcement: I am / we are long INTC. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose supply is mentioned in this article.
