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Intel: Low Growth, but Valuation Upside
Stock Analysis & Ideas

Intel: Low Growth, but Valuation Upside

Intel (NASDAQ: INTC) is a leading chip company, but due to some execution problems when it comes to new chip processes, shares have fallen out of favor compared to peers such as AMD (NASDAQ: AMD) and NVIDIA (NASDAQ: NVDA).

Valuations have to be considered, however, and Intel’s shares are pretty inexpensive today. The growth outlook isn’t great, but thanks to valuation upside potential and an above-average dividend yield of 2.8%, Intel could still generate solid returns over the coming years.

I am neutral on Intel at current prices. (See Analysts’ Top Stocks on TipRanks)

Intel: Mishaps Lead to Low Valuations

Intel is active in an industry with growth tailwinds, especially in the data center space and in areas such as automotive driving, where Intel has a strong market position thanks to its Mobileye division.

Despite market tailwinds and high R&D efforts, Intel has not executed very well in recent years, which is why it has lost market share to AMD and NVIDIA in high-value areas such as data centers and AI.

Process delays, such as the one that impacts its 7nm next-generation chips, have made it easy for Intel’s competitors to gain market share at Intel’s expense.

Nevertheless, Intel remains a highly profitable company that generates strong cash flows, which allow the company to invest heavily in future growth areas, including its Foundry business that seeks to make money by manufacturing chips that were designed by other companies.

Intel Is Very Inexpensive

The below-average growth rate in recent years, compared to the growth seen at AMD, NVIDIA, and many other semiconductor companies, has resulted in a pretty low valuation for Intel’s shares.

The better operating performance of Intel’s peers has made many investors favor those stocks over Intel, which is why their valuations are way higher than Intel’s.

Based on current earnings per share estimates for this year, Intel is trading for just 9.5x net profits today, which results in an earnings yield of more than 10% — which is very rare for tech stocks such as Intel.

Looking at Intel’s EV/EBITDA multiple, which accounts for debt usage and thus makes comparisons between companies that employ leverage differently more easy, Intel looks inexpensive as well. Its forward EV/EBITDA multiple is just 7x, versus readings of more than 30 for its peers AMD and NVIDIA. Intel is the player with the weakest growth rate, but it is also, by far, the least expensive among these three chip peers.

The company generated free cash flows of $17.3 billion over the last four quarters, which results in a free cash flow multiple of just 11.8, which, again, is a relatively low valuation for a tech company with growth tailwinds such as Intel. When we consider that FCF is impacted by Intel’s heavy investments, the low free cash flow multiple is even more surprising.

Intel’s strong free cash flow generation also allows the company to return more cash to its owners compared to the shareholder payouts we see at many other semiconductor companies. Intel pays a dividend that is yielding 2.8% right now, with dividend growth coming in at 6% a year over the last five years.

Intel also has bought back shares at a pace of around $10 billion in recent years, although that has slowed down to just $2 billion over the last four quarters, as Intel is ramping up its growth spending.

All in all, Intel is looking like a solid choice in the semiconductor space — its growth is not very strong, but thanks to large industry tailwinds, Intel should still be able to grow its business to some extent in the long run. At the same time, a very low valuation and an above-average dividend yield do result in solid income generation and multiple expansion potential.

Turning to Wall Street, Intel has a Hold consensus rating, based on the four Buys, 12 Holds, and seven Sells assigned in the last three months. At $53.80, the average Intel price target implies 7.2% upside potential.

Disclosure: At the time of publication, the author did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >

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