While the headline numbers reported last week were strong, the chip giant Intel (INTC) saw its shares drop when the company announced a delay in its 7nm product roadmap. When I featured that article on the reaction to earnings, stocks fell about 9% to $ 55, but they’ve lost a lot more since then, as seen in the chart below. At this point, it seems everyone thinks Intel is dead, but the numbers seem to suggest otherwise.
(Source: Yahoo! Finance)
It’s been a while since I saw a giant in your sector get so defeated, and I’m not just talking about the stock price. There were several negative notes from analysts, and one company suggested that this was Intel’s worst earnings call in its 11-plus years covering the name. Looking purely at the numbers, as someone who has written about this action since late 2011, I wholeheartedly disagree. Surely I can find many earnings reports where the overall numbers reported and the guidance provided were much worse. Remember, the second quarter results were very strong and the orientation was better than the street expected. Of course, they all seem to be accumulating even more after AMD (AMD) reported a strong quarter this week, with that company finally giving the current quarter above street expectations for the first time in more than two years.
With all these people ready to bury Intel, you would think that the projections in the future would be quite pessimistic. It turns out that that’s not really the case, as the following graph shows. Even if AMD can be 25% above current 2023 revenue estimates, for example, Intel is expected to make more revenue in a quarter than AMD will make in a full year! With dramatic movements in the stock price recently, the price / sales ratio for AMD is also substantially higher, even within three years. The valuation gap that price-to-earnings uses is even more staggering (8.8 vs. 29.0), given Intel’s enormous profitability.
(Source: Search for Alpha Estimate Pages for Intel and AMD, respectively)
Just to clarify the point about how different these names are, the Intel administration has led to a free cash flow of $ 17 billion this year. That’s almost double the amount of total revenue AMD plans to generate. In the first half of 2020, Intel generated more than $ 10.6 billion in free cash flow, resulting in more than $ 58 million per day. AMD throughout the six-month period generated a total free cash flow of $ 32 million.
It’s that strong cash flow that will help Intel continue to reward shareholders in a big way in the future. The drop in the stock price has an annual dividend yield of up to 2.75%, and the buyback should resume in the coming months. As the chart below shows, Intel has done a tremendous job of lowering its share count in the past decade, while AMD’s share count increased nearly 75% over the same time. Since Intel shares fell more than 20% in just one week, management was presented with an opportunity to use that buyback to their advantage, and that will help with future dividend increases.
(Source: quarterly documents, seen here)
Intel’s shares have been highly successful since the second-quarter earnings report, but we haven’t dug a grave for the company just yet. While the 7nm delay was not a welcome announcement, this is still a company that is generating a lot of revenue, net revenue, and free cash flow. Investors have certainly shifted their dollars to AMD in the past few days, but valuations seem questionable right now, especially given Intel’s capital return plan. Street analysts appear to be really pessimistic, but their estimates do not seem to show too much skepticism for years to come. Intel looks very different now that it’s down another $ 7 from where it was when I covered it right after earnings.
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