Intel (INTC) manufactures and sells microprocessors, chipsets, and flash memory, as well as other products and platforms for computing, storage, network, and other functions. Intel operates several data-centric businesses, including Data Center Group (DCG), Internet of Things (IOTG), Mobileye, Non-volatile Memory Solutions Group (NSG), Programmable Solutions Group (PSG), and the PC-centric business comprised of Client Computing Group (CCG).
Shares of Intel showed losses of about 2% in 2021, having underperformed, as the tech giant is under pressure both from competitors in the semiconductor business and from its own delays in the next generation of processors. I am bullish on INTC stock. It trades at an extremely attractive valuation and is investing heavily now in strengthening its global leadership in the semiconductors industry. (See Analysts’ Top Stocks on TipRanks)
Business Highlights
On October 27, 2021, at Intel’s Innovation event, several new products, along with new technology and new tools for developers, were announced. Some of the most up-to-date news highlights were “a unified Developer Zone, new oneAPI 2022 toolkits and new oneAPI Centers of Excellence designed to better enable developers to access reference designs, toolkits and other assets across AI, client, cloud, 5G/edge and gaming with an open, standard-based, unified programming environment.” Management also announced the launch of the 12th Gen Intel® Core™ family, including Intel Core i9-12900K.
Turning to autonomous vehicles, Intel announced that Mobileye, an Intel company, will start operating its 6-passenger, electric autonomous vehicle for commercial driverless ride-hailing services in Tel Aviv and Munich starting in 2022, under the MoovitAV service branding.
Among the important news that Intel announced over the past months, the most important one is the decision to invest $20 billion to build two new chip factories in Arizona. This investment decision supports Intel’s IDM 2.0 strategy, which is a combination of three components that allows the company to strengthen and expands its manufacturing, innovation, and product leadership.
According to the company’s press release, this strategy comprises not only “Intel’s global, internal factory network for at-scale manufacturing” to optimize products and improve economics, “Expanded use of third-party foundry capacity” to build relationships with third-party foundries, but also “Building a world-class foundry business, Intel Foundry Services,” which is big news. Intel Foundry Services (IFS) is a new business unit created to meet the demand for semiconductor manufacturing.
Furthermore, on September 8, 2021, it was reported that Intel had won a U.S. government project to develop a foundry ecosystem.
Q3 2021: Mixed Bag
The Q3 2021 earnings report for Intel was mixed. There was a beat on earnings but a miss on revenue. The Refinitiv estimates for Intel were for EPS adjusted of $1.11 and revenue adjusted of $18.24 billion. The actual figures were EPS adjusted of $1.71 and revenue adjusted of $18.1 billion.
Intel’s PC chip business revenue of $9.7 billion fell 2% on a year-over-year basis. In contrast, the IOTG business unit reported revenue of $1.0 billion, up 54% on a year-over-year basis, which was the highest increase among all business units. The Mobileye unit reported revenue of $326 million, up 39% compared to Q3 2020.
Investors were concerned by both the decline in revenue for its PC chip business, which is the largest business unit for Intel, and the warning that key fundamental metrics such as gross margin and free cash flow will be under pressure in the following two to three years. The pressure will result from the large capital expenditures in which Intel has engaged.
Valuation and Dividend Yield: Two Strong Reasons to be Bullish
Two promising signs for investors are Intel’s dividend yield and valuation. Intel has a forward dividend and yield of $1.39 and 2.79%, respectively. Simply Wall Street reports that INTC’s dividends per share have been stable in the past 10 years. On top of that, INTC’s dividend payments have increased over the past 10 years.
Moreover, INTC stock is undervalued, based on its PE Ratio (9.6x) compared to the U.S. Semiconductor industry average (30.2x). Also, its undervaluation is indicated by its PE Ratio (9.6x) compared to the U.S. market (17.6x), and on its PB Ratio (2.2x) compared to the U.S. Semiconductor industry average (4.9x).
Wall Street’s Take
Intel has a Hold consensus rating, based on 4 Buys, 12 Holds, and 6 Sells ratings. The average Intel price target of $53.90 represents a 10.8% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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