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Competition Is Heating Up for Intel

publication date: Apr 26, 2021
author/source: Brian Nelson, CFA

Image Shown: Intel's shares have outpaced the S&P 500 SPDR (SPY) since we removed them October 2020.

By Brian Nelson, CFA

We removed Intel (INTC) from the simulated newsletter portfolios in late October 2020. Since then, the chip giant has outpaced the index modestly. We’re not reading too much into this, but we wanted to keep the name in front of you as it has been an idea in the simulated newsletter portfolios in the past. Shares yield about ~2.4% at the time of this writing.

On April 22, Intel reported first-quarter 2021 results that showed flat non-GAAP revenue performance, while non-GAAP earnings per share declined modestly. Intel has lost a bit of its edge against Advanced Micro Devices (AMD) in recent years, and the market has been all over this. AMD’s stock has advanced nearly 50% during the past year, while Intel’s shares have been about flat over the same time period.

Part of the reason why we had been huge fans of Intel in the past had to do with its Data Center Group (DCG), but the segment posted revenue of $5.6 billion during the first quarter of 2021, down 20% on a year-over-year basis. As the world moves to the “cloud,” we would expect this area to be more of a secular grower, so the lackluster performance raises some major red flags. Though management expects a return to growth soon, Nvidia’s (NVDA) first data center CPU could make a sustainable bounce back more challenging for Intel.

Image Shown: Intel’s outlook for 2021. Image Source: Q1 2021 Earnings Presentation

That said, Intel raised its full-year 2021 guidance and now expects non-GAAP revenue of $72.5 billion (up $500 million from prior guidance) and non-GAAP EPS of $4.60 (up $0.05 from prior guidance). Free cash flow is now expected to come in at $10.5 billion on the year, up $500 million from prior guidance. We continue to remain cautious on shares, though management painted an optimistic tone with respect to its outlook on the conference call:

We continue to see very strong PC demand with both TAM and our internal PC supply growing double-digits year-over-year, but we expect CCG (Client Computing Group) revenue to be more first-half-weighted than normal seasonality due to industry-wide supply constraints and the continuing ramp-down of modem and Apple Mac revenue.

In data center, we expect increased demand in the second half as both cloud, enterprise and government segments return to growth. Gross margin percent will be lower in the second half of the year, predominantly due to increased 7-nanometer start-up costs and industry-wide supply constraints impacting client volume and mix. We expect increased R&D throughout the year as we invest in our roadmap and IDM 2.0 strategy (1).

Intel expects to continue to generate considerable free cash flow in 2021, well in excess of our expectations for its annual run-rate dividend payments of ~$5.5-$6 billion, and we fully expect it to make good on its payout. However, Intel’s move to invest in foundries to compete more aggressively with TSMC (TSM) and Samsung (SSNNF, SSNLF) coupled with increased competition from AMD and Nvidia means the company is walking on some thin ice from a competitive standpoint. With multiple balls in the year, Intel may come up short on its ambitions.

Valuentum’s Callum Turcan had the following to add: “AMD has really been eating into Intel's server chip market share of late and now Nvidia is also looking to get into that arena; it is not a pretty picture for Intel given its manufacturing problems.” Though Intel’s shares have held up since we removed them from the newsletter portfolios, we’re expecting some bad news on the horizon. The company’s large net debt position is yet another reason to be leary of the stock, even though free cash flow generation remains robust.

Concluding Thoughts

Intel has had a terrific run, but we think bad news may be on the horizon. The chip giant is juggling too many balls at the moment, and competition from the likes of AMD and Nvidia could result in some tough sledding in coming years. We don’t see much risk to the dividend payout, but the lower end of our fair value range may be a reasonable target for shares.

We feel that a big miss is coming that may take the market by surprise later this year or in 2022. Execution will be key, and Intel has its work cut out for it. We expect to make some tweaks to our valuation model given the report, but we don’t expect a material fair value estimate change at this time. The company’s Dividend Cushion ratio stands at 1.4.

(1) From the 10-Q: “On March 23, 2021, our CEO Pat Gelsinger announced our "IDM 2.0" strategy, the next evolution of our IDM model. IDM 2.0 combines three factors. First, we will continue to build the majority of our products in Intel fabs. Second, we expect our use of third-party foundry capacity to grow and to include manufacturing for a range of modular tiles on advanced process technologies. Third, we announced our plans to build a world-class foundry business with Intel Foundry Services, which will combine leading-edge process and packaging technology, committed capacity in the U.S. and Europe, and a world-class IP portfolio for customers, including x86 cores. To accelerate our IDM 2.0 strategy, we announced plans to invest $20.0 billion to build two new fabs in Arizona.”


Intel's 16-page Stock report (pdf)

Intel's Dividend Report (pdf)




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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, and IWM. Brian Nelson's household owns shares in HON, DIS, HAS. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.

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