Today, Apple (NASDAQ: AAPL) made headlines around the world after announcing that it was making a significant transition from Intel (NASDAQ: INTC) CPUs to ARM-based chips in its Macs. Still, Intel’s stock ended slightly on the day. The company has a market capitalization of more than $ 250 billion, approximately 13% of its 52-week high. However, as we will see throughout this article, Intel’s market position has peaked and the company is significantly overvalued.
Apple Silicon – Venture Beat
Intel and Apple
An avalanche of articles have emerged on various investment sites discussing the scale of Apple’s business with Intel and the risks posed. Some even argued that it was good news, as Apple accounted for 2 to 4% of Intel’s revenue and how demanding the company was for vendors.
Cloud Company Market Share – Statista
However, Apple’s transition is a sign of something better. Apple spends $ 1.5 to $ 3 billion annually on Intel CPUs and was able to justify the financial cost of switching to Arm-based processors. AWS earns more than 10 times a year, and even Salesforce (NYSE: CRM) earns that annually. That means that there are a number of other companies that can justify this change.
Currently, most stick with x86, because switching to ARM-based processors can be quite difficult as a result of running the software and CPUs. As more and more companies change, it will be easier. More importantly, other major tech companies are considering the change, such as Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOG) (NASDAQ: GOOGL).
We believe this change is the beginning of an overall trend, where companies realize they can do what Intel does for themselves and capture Intel’s high profit margins.
Intel Data Center Group
Taking a closer look at Intel’s business, we can take a look at the company’s data center pool. The group saw its revenues increase 43% year-on-year from $ 4.9 billion to $ 7.0 billion, highlighting its strong market position.
Intel Data Center Group – Intel Investor Presentation
However, it is important to pay attention to the threats facing the company’s data center group, one of its strongest and highest margin businesses. Specifically, the company’s recent success here was the result of the cloud’s continued strength. However, as we discussed earlier, that already has its own risks that are worth paying attention to.
Outside of that, even in the x86 space, the company faces increased competition from AMD’s best deals (AMD).
2 Socket Performance – ZDNet
AMD’s EPYC offerings, based on the company’s 7nm Ryzen architecture, allowed it to offer smaller processors at a much better price and value compared to Intel. Smaller processors with smaller transistors simply deliver better value in a way that Intel can’t match. The company cannot compete and the previous graph makes this clear.
The price / performance ratio is already becoming clear in applications. Forward-thinking consumers, such as some of the largest supercomputers to be built in the coming years, have announced that they will use ARM or AMD. As COVID-19 causes companies to reconsider costs, going with the best value, even in the slow world of intercompany sales, could increase dramatically.
Given the lack of exciting data center opportunities for Intel in the coming years, we see the current era as the peak for Intel. Intel has already announced its plan to limit AMD to a 20% market share, from its current market share of 1-2%. That already highlights the strength of AMD’s overall business and supports the current era idea as the peak.
Intel Client Computer Group
Intel’s largest business unit is the company’s client computing group that operates on both laptop and desktop computers with platforms and modems.
Intel Client Computing Growth – Intel Investor Presentation
Intel saw revenue improve and margins further improve after the company sold its group of 5G smartphone modems to Apple, coming out of a fairly low-profit business that Apple was effectively funding to separate from Qualcomm. The company has also seen strong performance on the back of 5G base station chips.
While that business is long-term secure (5G base stations), the 5G wave is expected to end in the next 1-2 years, as infrastructure is completed. However, the laptop and desktop companies did not perform as well, despite the strong period of time. Laptop revenue increased as ASP fell and desktop revenue declined despite a slight increase in ASP.
Going forward, AMD is doing much better in the desktop business, quickly becoming a much more formidable competitor to Intel. AMD already has a majority of sales at most premium retailers, tremendous growth compared to its insignificant position several years ago. Intel released its Comet Lake CPUs in older architecture, with its 8-core offering at $ 374 and 125 watts vs. AMD at $ 272 and 64 watts, with> 2,500 5-star reviews on Amazon.
AMD’s strength in this business is significant, and the dominance will likely continue. Intel clearly maintains higher prices to try to get the customers it can get from the brand, but logical customers are rapidly switching to AMD.
Other Intel Businesses
Now is not bad news about Intel: the company has some interesting businesses.
Intel Other Businesses – Intel Investor Presentation
Intel has some other cool revenue-generating companies with a major problem. However, it’s worth noting that even these companies come with tremendous competition and risk, and they certainly aren’t big enough to warrant Intel’s valuation. For example, the company’s Mobileye business generates ~ $ 350 million in annual operating revenue.
That’s good unless you ignore the $ 15.3 billion the company paid to acquire Mobileye. Three years after the acquisition, the company is not earning enough to cover the interest on the debt.
Other businesses like Optane and NAND generate strong revenue and growth, but still have negative operating income. Intel’s Optane business is exciting, with its new memory technology, but it’s nowhere near where it needs to be to justify a $ 250 billion valuation. The other Intel businesses mentioned above are just 10% of revenue.
Thesis risks
Our thesis is that Intel is highly overrated, however there are some risks worth paying attention to.
The first is that Intel is currently at least 1 processing node behind AMD. However, the company has much stronger customer relationships. If the company were to catch up with AMD, this could help drive valuation in the company’s core businesses.
The second risk is that Intel continues to invest heavily in R&D and technology is constantly changing. The company’s Optane memory highlights it. Intel will continue to be a great player in technology and the company could present itself or perform well in a new market segment that helps the company.
Our recommendation
Our recommendation at this point is that the market is significantly overvalued at this point, having recovered significantly from COVID-19 despite the fact that this is reflected in the labor markets. Today’s leaders in this country are using heavy deficit spending to support the stock markets, artificial spending that will not last and is reminiscent of a bubble.
By shortening an overvalued company into a portfolio, you not only benefit from the overvalued nature of the company, but also help cover the rest of your portfolio in an overpriced market. We believe this is a great opportunity that will result in strong returns with a percentage of your portfolio.
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Divulge: I am / we are short INTC. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
