Image Shown: The Invesco QQQ ETF (QQQ) has broken through its technical downtrend, and we don’t think Intel’s poor outlook will derail this tech rally. Image Source: TradingView
By Brian Nelson, CFA
The Invesco QQQ ETF (QQQ) has rallied more than 12% to start 2023, and we don’t think much will derail the advance. The pace of inflation looks like it peaked in June 2022 and save for a few big quarterly earnings misses from Goldman Sachs (GS) and Intel (INTC), fourth-quarter 2022 earnings season is shaping up better than feared for a lot of companies. The labor market is easing a bit, and a breakout of both the equal-weight S&P 500 (RSP) and the market-cap weight S&P 500 (SPY) from their technical downtrends means, in our view, that capital will continue to move into more aggressive and high-beta areas, playing right into the hands of the Invesco QQQ ETF.
Intel’s fourth-quarter results, released January 26, were nothing short of a disaster. The chip maker’s revenue dropped 32% on a year-over-year basis in the quarter, as its earnings per share dipped into negative territory. The big story with Intel is its deteriorating free cash flow, and the threat that it may pose to its dividend. Though the firm generated $3.1 billion in adjusted free cash flow for the three months ended December 31, 2022, the market remains laser-focused on its full-year performance. GAAP cash flow from operations for the year was $15.4 billion on the year, but net additions to property, plant and equipment of $23.7 billion were staggering, driving adjusted free cash on the year to -$4.1 billion (negative $4.1 billion).
Intel paid ~$6 billion in dividends during the past year, meaning that the chip giant burned through more than $10 billion in cash during 2022. This is no small thing either, as Intel’s balance sheet is no longer as strong as it once was. At the end of 2022, Intel had $37.7 billion in debt and $4.37 billion in short-term debt against cash and equivalents of $11.1 billion and short-term investments of $17.2 billion, so Intel has a rather large net debt position. Management plans to cut as much as $8-$10 billion in costs by the end of 2025, and we think the cost savings will be absolutely necessary, given the trajectory of its business. For the first quarter of 2023, Intel’s non-GAAP revenue is targeted in the range of $10.5-$11.5 billion, down 40% on a year-over-year basis, while it estimates it will lose $0.15 in non-GAAP earnings.
Image Source: Intel
Prior to Intel’s fourth-quarter earnings release, consensus had been for the company to earn $0.25 per share on $13.96 billion in sales, so the outlook represents a huge miss for Intel. The chip giant can probably shelve its plans for mid-to-high single digit revenue growth in 2023 and 2024 as well as its expectations for revenue growth to accelerate to 10%-12% by 2026. The big question is just how bad cash burn will be at Intel in the next few years, and whether the company will sustain its dividend. Adjusted free cash flow at Intel for 2023 and 2024 had been expected to be net neutral, but given the massive revenue declines experienced in the fourth quarter and the terrible outlook to kick off 2023, investors should be extremely cautious those targets, in our view.
With that said, however, Intel no longer is the bellwether it once was. Its market capitalization has dwindled significantly in recent years and now stands at ~116.5 billion, lower than Advanced Micro Devices’ (AMD) market capitalization of ~$121.6 billion, Texas Instruments’ (TXN) market capitalization of ~$158.8 billion, and Nvidia’s (NVDA) market capitalization of ~$501 billion. Taiwan Semiconductor (TSM) has a market capitalization of ~$431 billion, while ASML Holding (ASML) has a market capitalization of ~$268 billion. Intel no longer is what it once was, and as such, we don’t think its poor and borderline shocking outlook will derail a tech rally that could have significant legs. We still like these markets, and we don’t think Intel will spoil the party.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. 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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