JasonDoiy
Shares of Intel Corporation (NASDAQ:INTC) have seen some signs of life again. Shares have bounded from their lows around the $25 mark in recent weeks to $28 and change today. Just a couple of weeks ago I observed that Intel was seeing tough times, yet potential in the long haul was there.
In the meantime the much anticipated IPO of Mobileye Global Inc. (MBLY) has taken place. The offering was a big success in a harsh environment, while the company announced its third quarter results as well. This calls for a quick update on the thesis from two weeks ago.
A Quick Recap
Intel’s woes started far before the current technology selloff, as the company has had competitive issues already for years, with competition being ahead of Intel in terms of development. The combination of poor positioning and a slump in the market meant that the downturn is very painful, with profitability essentially gone, while large investments need to be made to revamp the business. This created a tough setup, yet fortunately the balance sheet is still strong, as the situation is not hopeless yet.
In the summer of 2020, Intel dropped a bombshell report as it announced that its 7nm product would see six months of delay, creating real potential for notably Advanced Micro Devices (AMD) to take away market share. The company hired veteran Patrick Gelsinger as CEO early in 2021 to revamp the business, but roughly 18 months in, results are not visible yet (which was not reasonably to be expected, of course).
As the development lags hurt future results, Intel still posted solid numbers in the meantime. 2020 sales came in at $77.9 billion, on which earnings of $5.30 per share (adjusted) were reported, as a 10-times earnings multiple looked cheap. The company furthermore benefited from the CHIPS act, under which the U.S. wants to onshore production, with Intel being active to announce multiple multi-billion developments, both in the U.S. and Europe. The company furthermore announced its intention to float Mobileye in 2021 at a $50 billion valuation, and it sold its NAND and SSD business to SK Hynix in a $7 billion deal.
Despite the lag in development, 2021 sales actually rose 1 percent to $79.0 billion as adjusted earnings per share were down a bit to $4.86 per share, still translating into steep earnings of $19.9 billion. Net debt fell to just $3 billion as the company guided for a tougher set-up in 2022.
Since the start of the year, shares have fallen from the low-fifties to $28 right now. First quarter sales fell 7% to $18.4 billion as adjusted earnings per share were down 35% to $0.87 per share. Second quarter sales fell 22% to $15.3 billion as adjusted earnings fell to a mere $0.29 per share, as softer performance in the client computing group spread to the datacenter business as well.
Full year sales were now seen at $65-$68 billion, with earnings seen at just $2.30 per share, as the capital spending budget was cut by four billion to $23 billion. This was based on flattish sales seen in the third quarter (on a sequential basis).
Given the softness, I had real doubts on the $30 billion valuation for Mobileye and feared that third quarter sales might even fall to $12-$14 billion, instead of being flattish on a sequential basis, although Intel, of course, was not tied so much to the crypto boom. This, the implicit backing of the U.S. government and attention on development, made me still upbeat on Intel, although I was actively adding money elsewhere in the chip sector, as Intel was actually a relative outperformer in terms of its share price performance so far this year.
What Happened?
After having still a cautious stance at $25 by mid-October, shares have bounced to $28 per share now, driven by the third quarter earnings report. Mobileye went public and now trades at $28 per share, as the company commands a $21 billion valuation, and with Intel still holding a roughly 94% of the shares, we can attach a $20 billion valuation to Intel’s stake in the business.
Later in the month, the company posted third quarter results, with sales down 20% to $15.3 billion, as revenues came in flat on a sequential basis. Adjusted earnings rose on a sequential basis to $0.59 per share as GAAP earnings came in at $0.25 per share, driven by myriads of changes. With net capital investment putting more pressure on the business given the minimal earnings and continued dividend payout, the balance sheet is in the reverse. The company ended the quarter with $17 billion in net debt, yet that is ahead of nearly $6 billion in equity investments, as this excludes a $20 billion valuation in Mobileye. It results are, of course, still incorporated in the results of Intel.
To address this issue, the company aims to cut costs by $3 billion in 2023, as well as another $8-$10 billion in annualized savings by 2025, huge efforts as operating expenses run around $25 billion here. This is driven by the worsening outlook, with full year sales now seen at just $63-$64 billion, with fourth quarter sales seen at $14-$15 billion, on which minimal adjusted earnings of $0.20 per share are seen. Full-year capital spending is now seen at $21 billion, with deprecation charges trending at $11 billion.
The question, of course, remains how the business can improve, if revenues can stabilize, and if cost cuts can be achieved without hurting the revamp in the development pipeline of the business.
What Now?
With net debt rapidly on the increase here given the lack of earnings, large capital expenditure requirements, and a still-solid dividend, Intel has to make some decisions. The first is that of a cut in operating expense, which will help in the near term, but might not be enough, so perhaps the $6 billion dividend might be partially at risk as well. Net capital spending and dividends now trend at around $16 billion per annum, yet even if the company can earn $2 per share, that only works down to $8 billion in earnings, as earnings trend quite a bit below that.
For me, a potential dividend cut is not the primary concern. Job cuts provide a great boost to the bottom line, but they might actually hurt the root issue of the business, meaning disappointments in the development pipeline. The increase in net debt is scary, although the company still operates with a net cash position if it sells equity investments, but not for long at this pace.
Amidst all of this, I am sticking to a long position, but see no reason to alter this here, either through operating on the buy or sell side, given the many developments in recent weeks.
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