Intel is the value game few can see



Intel (NASDAQ:INTC) shares are on a swing after markets close today; Investors are balancing disappointing results in the company’s first quarter 2023 announcement with management’s hopes of realizing its ambitious expansion plans for the future. While CEO Pat Gelsinger tried to calm the markets by saying in the press release that they were heavily focused on “…advancing our foundry business to best position us to capitalize on the opportunity market of 1,000 billion dollars to come”.

As investors slowly adjust to the difficult years ahead as Intel pivots its business model and undertakes major capital expenditures, such as a $20 billion investment in new facilities, which will enable the company to expand its IFS (Intel Foundry Services), what lies ahead could be a fundamentals-driven environment, with negative free cash flow becoming the norm for Intel; investors will have to dig deeper into the company to find the right deal.


Intel’s analyst ratings show signs of capitulation after placing a low single-digit rise from today’s closing price. Most of the sentiment has been a resounding ‘hold’ that has topped the ‘buy’ consensus from 2021. per share of $4.86 and adjusted from $5.47 at the time, compared to today’s per share loss of $0.66, may have added steam to the move in the feeling.

Investors suffered another blow today, as Intel reports a 36% annual drop in revenue, gross margins squeezed from 50% to 34% and cash flow figure largest negative available in the company’s history. Free cash flow for 2022 was a total loss of $9.4 billion; in the first quarter of 2023 alone, Intel posted negative free cash flow of $9.2 billion, nearly matching the company’s worst 12-month period. Additionally, the losses come amid a slowdown in the electronics industry, with companies like Apple (NASDAQ:AAPL) reporting a 40% drop in personal computer shipments.

Industry capacity utilization readings, an indicator of the balance of demand and supply, are below 70%, with the typical range tending to be around 77-82%. Intel’s capacity utilization has always been above 100%; thus, the dynamic issuance and redemption of debt securities sported by the company, today’s reading is just 21.4% to be the lowest ever in the company’s history.

Return on invested capital (ROIC) measures historically hover around 16-22% for shareholders today – and in another first – the company is reporting -1% to -3% return on invested capital. Added to the bearish news are pessimistic – albeit realistic – indications from the management presentation, which expects no growth of $11.5-12.5 billion in revenue and a loss per share of 0 $.04 which rarely excites the markets. Investors, who have reason to clench their jaws today, also digested that Intel issued 175 million shares during the 12-month comparison, diluting their ownership.

Deep (more) value

Markets are generally forward-looking; the Intel chart shows the stock has been selling since the start of 2022, where a 52% drop in prices could have been the effects of markets expecting the inevitable deterioration in fundamentals amid macro developments. So why are stocks up 8% in the after-market session if all of the first-quarter financial data shows symptoms of a failing business?

The answer to today’s strange price action lies in Intel’s financials, namely the balance sheet. Investors will find that the net asset value per share (NAV), calculated as total assets minus total debt, comes to $31.30, then taking the book value per share to $23.6; there is the first clue of a ceiling and a basement. Intel shares have been trading in a channel between those two numbers, $23 for book value and $31 for net asset value, since the first low in October 2022.

Historically, Intel’s price-to-book multiple has hovered around 3x, thus taking the current book value of $23.6 per share and applying the historical multiple gives investors a benchmark value of $70.8, which happens to be quite close to the stock’s 2020 high of $69.29. Being more cautious with this multiple will still provide upside potential for investors. Taking a second look at the CEO’s comment “…capitalize on the upcoming $1 trillion market opportunity.” How can the markets think this statement?

Foundry Services represents that underlying opportunity, a business that generated $118 million in revenue for the company and made progress in new areas. For example, in April, Intel announced a collaboration agreement with UK-based ARM, making Intel’s 18A process the method of choice for the company’s chip production. With foundry services accounting for less than 2% of revenue, successful collaborations could translate to higher IFS adoption rates, quickly bringing this service up to speed and enabling capital expenditures in the facilities to bear fruit.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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