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Elevator Pitch
I have a Hold investment rating assigned to Intel Corporation’s (NASDAQ:INTC) stock.
I discussed Intel’s stock price dip in my earlier June 28, 2022, article. My latest article assesses the potential impact of the CHIPS Act on INTC’s future prospects.
Intel will benefit from the CHIPS Act, as the grants and tax credits will form part of the funding required for the company’s future capital investments. This puts INTC in a favorable position to maintain its current dividends going forward, which translates into an appealing forward dividend yield of 4.2%. However, I still have doubts about Intel’s execution, and this is validated by the company’s below-expectations Q2 2022 earnings.
Taking into account both the positives associated with the CHIPS Act and the negatives relating to its execution, my view of Intel’s outlook is mixed implying a Hold rating.
What Is The CHIPS Act?
Intel recently announced on August 23, 2022 that it had entered into an “agreement with Brookfield (BIP) to jointly invest up to $30 billion in leading-edge chip factories in Arizona.” It is noteworthy that INTC specifically mentioned that this deal “builds on the momentum from the recent passage of the CHIPS Act in the U.S.” This draws investors’ attention to the CHIPS Act, which was signed by Biden earlier in the month on August 9, 2022.
According to a press release issued by The White House, the CHIPS Act or H.R. 4346 is a piece of legislation that will offer “$52.7 billion for American semiconductor research, development, manufacturing, and workforce development” and a 25% “investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.”
A key metric worth noting is that the US currently accounts for only 12% of worldwide semiconductor manufacturing, which represents a significant drop from the 37% market share in the global semiconductor industry that it used to command three decades ago. With the rise in geopolitical tensions and conflicts in recent times, it becomes even more critical for the US to lower its dependence on semiconductors imported from other countries or markets. As such, it is easy to understand why the CHIPS Act is necessary as part of the US’s efforts with regards to localizing semiconductor manufacturing.
In the subsequent section, I touch on how Intel could be potentially affected by the CHIPS Act.
Will The CHIPS Act Impact Intel?
In my view, the CHIPS Act will have a positive impact on Intel.
Earlier, INTC emphasized at the company’s most recent Q2 2022 investor call on July 28, 2022 that the CHIPS Act “is beneficial to Intel”, as “access to mission aligned pools of capital supports the accelerated pursuit of our strategy.”
Intel had previously mentioned that the company could potentially receive subsidies of up to $3 billion for a single fab which costs around $10 billion to construct, as part of the CHIPS Act. Separately, a sell-side analyst from Bank of America (BAC) estimated that INTC might get “between $10B and $15B worth of the $52B in assistance (grants from the CHIPS Act) over the next 5 years” as highlighted in an August 9, 2022 Seeking Alpha News article.
At its second-quarter earnings briefing in late-July, INTC stressed that “it’s a little early to determine exactly how all that (the CHIPS Act) is administered and makes its way into our P&L (Profit & Loss).” In other words, Intel is likely to provide more detailed financial guidance in relation to the impact of the CHIPS Act at a later stage. But Intel did reveal that the company expects to only start receiving the relevant tax credits and grants relating to the CHIPS Act in 2023.
Also, it is highly probable that Intel will be able to sustain its current dividends; INTC currently offers an attractive consensus forward next twelve months’ dividend yield of 4.2% as per S&P Capital IQ. In the past, there were concerns that Intel might have to reduce its dividend payout going forward due to significant capital investment needs. Looking ahead, Intel should be in a good position to strike a balance between capital investment and capital return, taking into account the tax credits and grants associated with the CHIPS Act and other financing arrangements (such as the Brookfield deal highlighted in the preceding section).
In summary, Intel should benefit from the CHIPS Act, as this offers another key funding source for its capital expenditures and supports future shareholder capital returns. I review the key metrics disclosed as part of Intel’s most recent quarterly results in the next section.
INTC Stock Key Metrics
Intel’s recent Q2 2022 financial performance and its forward-looking guidance were disappointing.
INTC’s revenue contracted by -17% YoY from $18.5 billion in the second quarter of 2021 to $15.3 billion in the most recent quarter. This also represented a -16% decline in QoQ terms. The company’s Q2 2022 top line turned out to be 15% and 14% below the mid-point of its prior management guidance at $18.0 billion and Wall Street’s consensus estimate of $17.92 billion, respectively.
Non-GAAP adjusted earnings per share or EPS for Intel fell by 79% YoY from $1.36 in Q2 2021 to $0.29 for Q2 2022. INTC’s most recent quarterly bottom line came in 59% below the sell-side’s consensus forecast of $0.70 per share, which is the same as what management guided for previously.
The company’s outlook for the third quarter of 2022 wasn’t encouraging as well. The mid-point of Intel’s Q3 2022 revenue guidance at $15.5 billion translates into a 19% YoY drop and a mere 1% QoQ increase, and this is 17% below the market’s consensus top line expectation of $18.67 billion.
Similarly, INTC’s third-quarter gross profit margin guidance of 46.5% and normalized EPS guidance of $0.35 were 5.1% and 60% lower as compared to the analysts’ consensus gross margin and EPS projections of 51.6% and $0.87, respectively according to S&P Capital IQ.
What To Look Out For In Intel’s Long-Term Outlook?
The key thing to look out for when it comes to evaluating the company’s prospects in the long run is execution.
In my prior update for INTC published in June 2022, I noted that there was “a delay in the delivery of Sapphire Rapids to the second half of 2022.” I also highlighted in my June article that the delay “raises questions about Intel’s execution.”
Notably, Intel Corporation admitted at its Q2 2022 earnings briefing that the weak and below-expectations second-quarter financial performance “reflected our own execution issues in areas like product design, DCAI (Data Center And Artificial Intelligence), and the ramp of AXG (Accelerated Computing Systems and Graphic) offerings.”
In the current challenging market environment, companies in general are already facing lots of external challenges such as inflationary cost pressures and stiffer competition (as corporate and consumer spending shrinks). As such, Intel isn’t doing itself any favors by being bogged down with internal issues like execution.
In conclusion, I have an unfavorable view of Intel’s long-term outlook now, as I don’t have the confidence that the company can achieve its plans and targets in the long run when it has yet to get its execution right. I will continue to look out for and monitor INTC’s execution closely going forward.
Is Intel Stock A Good Investment Long-Term?
I don’t view Intel stock to be a good investment for the long-term, based on a comparison of the stock’s current valuations with its expected earnings growth rate.
Intel is now valued by the market at a consensus forward fiscal 2022 normalized P/E of 15.3 times based on S&P Capital IQ’s valuation data. As a comparison, Wall Street analysts predict that INTC’s normalized EPS will grow by a CAGR of +17.4% for the FY 2023-2025 period.
This translates into a price/earnings-to-growth or PEG ratio of 0.88 times for Intel. Using the rule of thumb that a PEG multiple of 1.0 times represents a fair valuation, INTC is fairly valued or at most slightly undervalued. Furthermore, the consensus expectations for Intel’s future earnings growth might still be too optimistic, considering the execution issues I referred to in the earlier section.
In other words, INTC’s current valuations aren’t sufficiently attractive, and its current share price isn’t a good entry point for investors looking to buy and hold Intel’s shares for the long run.
Is INTC Stock A Buy, Sell, Or Hold?
I rate Intel’s stock as a Hold. The CHIPS Act is positive for Intel, given that it will help to finance part of INTC’s capital investments and sustain the company’s future dividends. On the other hand, Intel’s sub-par Q2 2022 financial results provide support for my view that INTC is facing considerable execution issues, which could possibly make it difficult for the company to implement its various growth plans and initiatives for the long-term.
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