JasonDoiy
Shares of Intel (NASDAQ:INTC) cannot seem to get a break. After shares were under pressure already last year, on the back of self-inflicted issues with the company lagging development trajectories of its peers, shares have come under further pressure as the sector at large has seen a big pullback this year, and certainly in recent months.
In February of this year, I last looked at Intel as it acquired smaller peer Tower Semiconductor, a strategic deal for the company to regain some competitiveness from its self-inflicted wounds. This came as the company has been lagging in terms of development, losing market share to the likes of Advanced Micro Devices (AMD), and others.
Some Background
Intel’s woes really started in the summer of 2020 as the company announced a 6-month delay in its 7nm product transition, then seen late in 2022 or early in 2023, creating a real opportunity for AMD to gain market share. Consequently, Pat Gelsinger was hired in 2021 in an attempt to revamp the business.
With lags in the product development hurting future results, 2020 numbers were still solid with revenues posted at $77.9 billion on which the company earned $5.30 per share (on an adjusted basis). Shares rallied to $70 in April 2021 on the back of the 2020 results and hope for a turnaround, as well as runaway market conditions.
With shares falling to $50 in the summer, I was becoming slowly upbeat at 10 times earnings, at a time when market valuations (and certainly technology valuations) were increasing rapidly, as there were no quick fixes in sight.
The company has seen huge developments on the corporate front, announcing huge capital investments into the US under the “CHIPS” act, and later in the year the company announced its intention to float Mobileye. The company hoped to fetch $50 billion, but these are just hopes as the company sold its NAND and SSD business in a $7 billion deal to SK hynix as well.
As it turned out, 2021 sales actually rose a percent to $79.0 billion, as adjusted earnings of $4.86 per share were down eight cents, still coming in at $19.9 billion in actual dollar terms. Net debt fell to $3 billion (including equity investments as holdings), much needed given the upcoming and continued capital spending requirements and the fact that 2022 results were seen at much lower numbers, with first quarter earnings seen around $0.80 per share.
With shares falling to the $40s earlier this year, I found the set-up not that impressive, but compelling enough to buy the dip in the shares a bit more.
Ouch!
Since February, shares have fallen from levels around the $40 mark to a low of $25 which is a very painful correction, but actually marks a bit of an outperformance to many peers. In March of this year, Intel announced another mega project, earmarking EUR17 billion for a new leading-edge semiconductor mega site in Germany.
In April, Intel posted a 7% fall in first quarter sales to $18.4 billion as adjusted earnings fell to $0.87 per share, a bit higher than initially guided for, yet still down 35% year-over-year. Second quarter sales were seen around $18.0 billion with adjusted earnings seen down to $0.70 per share, with full year earnings now seen around $3.60 per share on $76 billion in sales. Cash flow conversion is problematic with capital spending seen at $27 billion in 2022.
Fortunately, net cash was posted at $7.4 billion, that is if we treat $6 billion in equity investments as cash alike investments. This strong balance sheet is needed to turn around the business as full year capital spending of $27 billion exceeded the run rate in depreciation charges of $11 billion by some $16 billion here. These net capital investments will actually exceed the anticipated (adjusted) earnings of around $15 billion this year.
A poor competitive position and softer chip market was really seen in the second quarter as revenues fell 22% to $15.3 billion, as adjusted earnings fell to just $0.29 per share, with GAAP losses posted at $0.11 per share. Right now, weakness in the key client computing group was also seen in the datacenter group. The company guided for flattish results (on a sequential basis) in the third quarter, but only sees full year sales at $65-$68 billion, adjusted earnings of $2.30 per share, while the company cut capital spending to $23 billion. Right now, the company already incurred a modest net debt load following net capital spending requirements, dividend payouts and earnings being pressured.
Despite the market woes, or better said terrible market conditions for IPOs, Intel seems to proceed with its plans to list Mobileye, as it has filed its registration statement early in October. While a $50 billion deal is not expected, we have to recognize that the market value of Intel itself has shrunken to just around $100 billion here, but the question is what valuations will look like for the unit.
With a near $2 billion run rate in very profitable revenues, Mobileye is responsible for just a fraction of Intel’s revenues, giving it likely an outsized valuation here in relation to its revenue contribution. This is furthermore very welcomed given the billions needed to be spent on the business at large. Filing papers suggest that Mobileye is targeted to be listed around $30 billion valuation, equal to about $7.50 per share, after Intel bought the business in a $15 billion deal in 2017. Quite frankly, I have some doubts if this valuation can be achieved.
And Now?
The truth is that earnings are non-existing right now, and with many peers announcing profit warnings virtually every day, one should not have high hopes for the third quarter, with further weakness likely seen. Hence, there are many moving factors, yet fortunately the balance sheet is quite strong and Intel still has Mobileye to be monetized. This is badly needed with earnings power being quite limited, while Intel remains committed to its $6 billion annual dividend, and net capital investments remained elevated.
Given the warnings posted by AMD and others, I see a real possibility for third quarter sales to fall to let’s say $12-$14 billion, instead of the anticipated flattish sequential revenue numbers. The only benefit is that Intel has not been a big crypto benefit like AMD, or NVIDIA (NVDA) for that matter, making the pullback likely less painful now.
This and the implicit backing of the US government, given the heightened political tension around chips, is welcome but cannot overcome the weakness in its product development, which is clearly there. With better run chip names having seen a big, or even bigger pullback in recent times, I am adding across the sector here. That being said, I am earmarking more money to fallen chip manufacturers outside Intel, simply for the fact that they have come down a lot more.
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