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Intel Stock Analysis

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by Gavin in Blog
April 29, 2020 0 comments

Overview

History

Intel Corporation was formed in 1968 in California and has been in the chip and semiconductor business since its inception.  A key moment came for the company in 1981 when IBM contracted Intel to produce the CPU for the first mass-produced Personal Computer.  Intel capitalized further on this by selling the CPU to competitor PC manufacturers who drove down the price of PCs, which spurred the demand and widespread consumption of personal computing that we still see today.

Intel continued with this strategy of non-exclusivity, and by the mid-90s had its CPUs in 40% of the market.  Intel continued to gain market share bit by bit until in 2005 a deal with Apple (NASADAQ:AAPL) cemented its domination of the personal computing market.  This was upset recently on 4/22/20 when news broke that Apple planned to bring its CPU manufacturing in-house with partner Taiwan Semiconductor (NYSE:TSM) beginning in 2021.  Apple said that the move will allow easier integration between its products as well as reduce its reliance on Intel.

Leadership

CEO and Director Robert Holmes Swan has been at the helm of Intel since January 2019.  Before that, he was the CFO of Intel beginning in 2016 after leaving a private equity firm based in New York City.  The most substantial part of his background is his 9 years at eBay (NASDAQ:EBAY) where he was CFO and remains a board member.

Another key influence, Andy Bryant, has been at the company since 1981. Though he recently stepped down from his position as chairman, he remains on the board until May 2020 and then plans to continue advising Intel for the foreseeable future.  He previously served as the company’s CFO as well as Chief Administrative Officer.  He was replaced as chairman by Dr. Omar Ishrak who is the CEO of medical device company Medtronic (NYSE:MDT).

Market Segments

Intel is broken up into 6 key groups as well as a 7th miscellaneous category.  The 6 groups are Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, and the Programmable Solutions Group.

In its recent Q1-2020 earnings statement it’s clear that the CCG and DCG do the heavy lifting accounting for nearly all of the company’s operating income.  Although 5 of the 6 groups are profitable.  The only group with a loss was the Non-Volatile Memory Solutions Group which lost $66mm this Q1 compared to a loss of $297mm in the same quarter last year.

The CCG focuses on products related to personal computing, notebooks, desktops, phones, tablets, etc.  The DCG focuses on enterprise solutions, most notably cloud platforms and storage.

As of last year, there seemed to be some skepticism among analysts about how Intel is breaking up the work between groups.  They suggest that the DCG is less profitable than it appears because much of the spending done to support this enterprise-focused segment is taking place in smaller groups which are much less or not at all profitable.

Competitors

Intel competes mostly with AMD(NASDAQ:AMD), Nvidia (NASDAQ:NVDA), Samsung (KRX:005930), IBM(NYSE:IBM), and significantly, as of this week, Taiwan Semiconductors.  IBM used to use Intel components but moved that production in-house and now competes directly with its former supplier.  AMD, who Intel has an IP sharing agreement with, and Nvidia are strong competitors and have a technological edge on Intel when it comes to Graphics Processing Units.  Intel has had difficulty moving as quickly as they need to regarding advances in technology which is one of the reasons Apple made the move that it did.  Intel competes with Samsung to a lesser extent and only in the smartphone component of the PCG.

A more recent competitor that’s emerging is Amazon (NASDAQ:AMZN).  In December of 2019 Amazon announced that it was launching a product to compete with Intel’s server chips.  Intel currently enjoys a ~90% market share here but is facing tougher competition from AMD and now Amazon looks to bring chips for Amazon Web Services in-house.  Intel’s Xeon chip still dominates the category, but expect this trend of market share loss to continue as AMD picks up steam and former or would-be customers become self-reliant.  Operating Income was up to $3.4B Q1 2020 up from $1.8B during the same period last year; an 89% increase.  Revenue for the period was up only 43% YOY.  So certainly they’re doing something right.

Intel will need to perform well in the GPU competition as this type of processing power and technology becomes more prevalent in data centers and mainstream computing.  They’re currently developing their second attempt at a product in this category, the Intel Xe, after years of leaving AMD and Nvidia unrivaled except by each other.

The Numbers

Balance Sheet

Intel, according to its most recent earnings statement, has $11.3B in cash which is a substantial increase from Q4 2019.  Over the last few years, they’ve had a noticeably strong uptrend in Inventories particularly in the Work In Progress subcategory.  They also had strong growth in Property, Plant and Equipment, most notably in Buildings.  A 22% increase in this subcategory to a total of $37.74B in 2019.  Buildings account for better than a quarter of Intel’s total assets, so beware if there’s a large correction in real estate valuations.  This category was not called out specifically in Intel’s recent quarterly statement.

Total liabilities have been increasing slightly over the prior three years, and Intel has a debt/equity ratio of .477 and a quick ratio of 1.18.  Total shareholder equity $76B as of the end Q1 2020 which is a small decrease from the end of 2019.

Income Statement

As noted previously, the CCG and DCG make up the majority of Intel’s revenue at 84.5%.  Intel saw a 23.4% increase in total revenue in Q1 2020 compared to Q1 2019.

The DCG saw a massive increase in operating income of 89.6%.  The CCG increased by a little better than a third, and the company as a whole increased operating income by 69% which includes combined losses of $1.7B from the Non-Volatile Memory Solutions Group and “All other.”

In a supplemental sheet, Intel specifies that notebook sales were up 22% YOY while desktop sales were down 4% for the same period.  Selling prices were down for notebooks but up for desktops.  They also note that both volumes and average selling prices were up substantially for DCG platforms which is what one would expect given the group’s revenue and operating income numbers.

Cash Flow

Intel had a net increase of cash and cash equivalents at the end of Q1 2020 of $7.1B primarily driven by issuance of $10.2B in long term debt.  It noted in its report that it anticipates the pandemic to cause liquidity issues in capital markets, so presumably, it is preparing for such scenarios.  The offering of Senior Notes was during the last week of March and consisted of expirations from 2025 to 2060.  The 2060 notes pay 4.95%, and the 2025 pay 3.4%.

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Short Interest, Implied Volatility, etc.

As of March 30, 2020, short interest as a percent of float was 0.99%.  Ahead of its Q1 earnings report, there was twice as much volume in calls than puts and an implied move to the upside of 6.6%. While Intel did outperform estimates, the share price did not react as one would have expected due to the news coming from Apple.  The 30-day put-call ratio for open interest was as high as 3 in early March but has since tracked down to the .5 range.  Implied volatility is high right now on a historical basis but has come down significantly from the levels that were seen in early March.

Technical Analysis

There are currently only about 22% of stocks in the S&P 500 that are above there 200-day moving average, an Intel is one of them. That’s a sign that it is one of the stronger stocks in the market right now.

The stock is also above the 20 and 50-day moving averages, another good sign.

If the market continues to improve following the corona virus meltdown, INTC stock should do well provided it can remain above the 200-day moving average which currently sits around $55.

I would look to sell bull puts spreads with the short strike around $50 and have a stop loss if the stock breaks below $55.

If it does break $55, I might even switch to bear call spreads.

Q1 2020 Earnings

Guidance

The first sentence of Intel’s statement on forward guidance contained the words “materially adversely” which are the new buzzwords.  Aside from the disruptions to capital markets and potential liquidity issues, the main problem that it faces is the closing of or reduced access to its manufacturing facilities.  The same uncertainty is present for its suppliers and vendors who are all facing tremendous demand uncertainty aside from the restrictions or complete shutdowns that they’re dealing with.  Intel also specifies that it is adversely impacted by uncertainty regarding trade agreements, particularly in the USA and surrounding the departure of the UK from the EU.

Intel says that demand for the products and services is very variable and sensitive to business and economic conditions and that it operates in highly competitive markets.  Many of its operational costs are either fixed outright or are “difficult to reduce in the short term.”  Intel also tamps down expectations about new “adjacent” products that it has introduced and areas that it has entered.  It doesn’t say specifically that its stock repurchase program is being halted, but it does say that it’s subjective and dependent on many factors.

Transcript Takeaways

“Between Intel and our foundation, we are providing $10 million toward coronavirus relief in the communities where we have significant presence….We also want to assist our community’s critically important healthcare workers in any way possible. So we have committed more than 1 million items of personal protective equipment.”

-CEO Bob Swan

“…we have a fantastic supply chain group, but also our manufacturing team is keeping the factories up and running, delivering 90% on-time commits in a quarter like this. “

-CFO George Davis

“Clearly, cloud is a tailwind and cloud and mobile compute are a tailwind for the first half for sure. I think cloud continues to be — will probably be helpful throughout the year. But, at some point, we’re going to see the impact of the recession, start to impact demand on PC. So we’re — that’s certainly a headwind. That is a reasonable expectation for the second half of the year.  We’re already seeing the impact of the recession on IOTG, particularly, in industrial and retail.”

-CFO George Davis

“Obviously in the first quarter, demand was also greater, it was greater across the board, server and notebook, in particular. And we were able to keep pace with accelerating demands as the quarter closed. So we’re in pretty good shape in terms of the promise we’ve made to our customers and that is that we will not — we will put the capacity in place. So we are not a constraint on their growth and we are in very good shape despite all the challenges. That being said, we haven’t replenished inventory levels. So meeting mix dynamics across the board is — we’re still not quite there yet, but we’re in line a little bit better than we had hoped.”

-CEO Bob Swan

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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