Dear value investors, dear students, some of you have reached out to me to inquire how I look at Intel Corporation as Intel looks currently extremely cheap from a valuation perspective, isn’t it ? What I will be providing in the next paragraphs is my own view without reinventing the wheel just reusing the 3 levels of tests of the value investing course. In any case and as always I want you to treat such an analysis as educational as I share very transparently my own though process and it is not a solicitation to buy or sell the company being discussed here :

Level 1 tests :

Is the company a blue chip company : If we consider that in order to be a bluechip the company needs to be systematically considered a large market capitalization & big brand, Intel Corporation definitely is one. Intel keeps with Gamers as well a strong brand position as core gamers do not like to switch from a high-performance Intel “I” series processor to AMD or cheaper Intel Series. Current market cap has decreased though to approximately 108 BUSD which gives Intel still a large-cap market valuation largely above the mid cap threshold of 10BUSD. The share price has been beaten up declining from above 65 USD per share in April 2021 to around 25 USD per share in October 2022. More about the brand valuation & purchasing power of the brand in the level 3 tests.
Earnings consistency : from a revenue perspective, Intel has no indication of stagnation looking at yearly revenues since 2012 until 2021 full year (source : https://www.morningstar.com/stocks/xnas/intc/financials). Remember that value investors can accept a quarterly miss as long as the miss does not became the standard. Net income to common stockholders has always been positive fluctuating between 10BUSD annually to 21BUSD in 2021 where Intel benefitted of tailwinds due to COVID related lockdowns and need for home/remote work equipment pushing up their revenues on end-user devices strongly up.
Price to Earnings (P/E) ratio is currently below 10 hence it looks like cheap and if you as an investor had unlimited financial resources you would be buying 10 years of current earnings.
Return to shareholders : Intel can definitely be classified as providing systematically return to shareholders either through cash dividends or through share buybacks. If you look at the consolidated view on return to shareholders on Morningstar.com (source : https://www.morningstar.com/stocks/xnas/intc/dividends), you can see that the dividends per share from a cash perspective have been increasing linearly since 2012 to 2021 from 0.87 USD to 1.39 USD per share. Until 2021, Intel has also been systematically adding non cash dividends under the form of share buybacks to its shareholders. Last but not least the payout ratio is in the confortable range of 48% to 30% since 2012 leaving at current levels of earnings a reasonable safety margin to continue paying out dividends but again under the assumption of current levels of earnings.
ROE, ROIC, RONTA : looking at consolidated historical figures since 2012 to 2021 (source : www.morningstar.com/stocks/xnas/intc/performance) , ROIC has been systematically above 10% which is another sign of a moat, the pluriannual consistency on ROIC. Return on Equity & Assets confirm the same trend.
Debt to Equity (D/E) and Debt to Assets (D/A). Debt to Equity stands at 0.35 which clearly confirms that the company has the capacity to invest a lot potentially to close any product or services related gaps. Do remember as an investor that CEOs are very often bad at capital allocation even when capital is available. Very often they overpromise returns that are not happening. I am not saying this specifically for the CEO of Intel Corp. but I just want to mention that having capacity to invest does not mean that customers/buyers will follow. There maybe structural changes in an industry that cannot just be turned around by capital availability.

Level 2 tests :

P/B stands currently at 1.05. Remember that you are buying a company not for its assets but for the amount of future cash flows that those assets will generate. A price to book value of 1.05 is extremely low.
Brand valuation : looking at the latest Intel balance sheet, Goodwill sits at 27BUSD and non-goodwill related intangibles 16BUSD. If you make the sum you can see looking further in the level 3 tests that Interbrand is valuing the Intel brand at 35.7BUSD in their latest annual Top100 worldwide brands listing. Hence there is not a lot to adjust the balance sheet from a brand valuation perspective. For those who did the advanced Company Valuation course, looking at the tangible assets specifically PP&E, probably land is carried at cost in the 40.039BUSD of properties on total assets worth 170.42 BUSD. I would expect doing a deeper analysis that we could find a way of increase the amount of assets hence through that increasing the total balance sheet and its equity portion (as debt remains constant).
Dividend Discount Model – our Excel file with the latest annual figures provides a very interesting cash dividend yield of above 5% pretax. If you add share buybacks to it, Intel yields at 7% pretax which is a lot. Intrinsic value calculation using the DDM model including dividend growth at yearly 6% historically and share buybacks (my cost of capital is at 8.5%) delivers an IV at approximately 78 USD per share
Discounted Future Earnings Model. On future earnings IV calculation delivers an approximative valuation of 69 USD per share
Discounted FCF Model. On the FCFF IV calculation we land at 16,88 USD per share due to the high investments that Intel is currently engaging. From 2019 to 2021 their investing cash flow has gone from 14BUSD annually to above 20BUSD annually. Hence arbitration is required here to understand how the long-term investing cash flow will positively impact the short-term operating cash flow.

Level 3 tests :

Brand valuation – the moat
- Intel is in the 2021 Interbrand ranking, ranked 17th brand worldwide with a brand valuation at 35.7BUSD (-3% YoY). In 2020 Interbrand ranking Intel was ranked 12th with a brand valuation at 36.971 BUSD (-8% YoY). In 2019, Interbrand ranked Intel brand 13th with a brand valuation at 40.197BUSD (-7% YoY). It is interesting to see that over the last 3 years according to Interbrand, Intel seems to be losing brand power as consistently declining in brand valuation. At the same time, the brand remains very well known.
Debtors / rating agencies sentiment
- According to Moody’s, the current rating is an A1 which is upper medium investment grade level (source : https://www.moodys.com/credit-ratings/Intel-Corporation-credit-rating-408095/ratings/view-by-debt?source=MIS&isWithDrawnIncluded=false&obj_id=824864963)
Buyers / customers sentiment
- NPS score 2022 is +52 which is very good according to https://customer.guru/net-promoter-score/intel
Employee sentiment & promoter score : according to Glassdoor.com (source: www.glassdoor.com/Overview/Working-at-Intel-Corporation-EI_IE1519.11,28.htm) , Intel has an overall score of 4.3 with 89% of the employees surveyed willing to recommend to a friend. The positive business outlook is at 73% with all metrics increasing since many months
Stewardship CEO appreciation : according to the same Glassdoor.com source, Intel employees credit CEO Pat Gelsinger with a 96% in terms of CEO approval which is very high.

Let’s be very honest when looking at the level 3 tests with the exception of the Discounted Cash Flow calculation that is NOT giving us the necessary safety margin vs the current market price provided by Mr Market, all other criteria seem to tick the boxes hence concluding that Intel is a cheap buying opportunity.

Now before wrapping up do not forget that not only shall you look at the 3 categories of tests provided in the course but a serious value investors adds some more intangible criteria, let’s call them qualitative criteria vs quantitative criteria (which are the 3 categories of tests just exposed) and this is why investing is an art and not just a quantitative aspect a machine can follow, at least according to me. Those intangible criteria are as well discussed in the "Art of Value investing" course hence should be known to you.

Act as a business owner. Acting as an owner means that if you would have unlimited capital you would potentially buy the whole company if all tests are met, right ?

Let me combine here the mindset of a business owner with the circle of competence that is ALSO one of our fundamentals attributes as value investor meaning by that you SHALL understand what you are buying : It happens that technology has been my main professional background for many years having worked in the Tech sector on top of my Value investing activity until value investing became my sole activity combined to non executive board memberships. So here comes my business perspective why despite the good results in the level 3 tests personnally I am unsure about Intel Corporation trying to understand how reasonable the next 30 years look like. The order I am listing my thoughts here is not important but the combination of them :

Intel is according to me (and I am not the only one stating this) lagging behind in terms of technology leadership compared to Taiwan’s Semiconductor Manufacturing (TSMC) in terms of nanometer design and energy efficiency. Just read the latest articles about the Microsoft Surface devices launched by Microsoft either with Intel latest generation chipset and the ARM chipset. Look specifically for comments about weight, processor physical space and battery life. I have been myself able to experience the Apple M1 processor for 2 years on my Macbook AIR using ARM technology while in parallel using a Microsoft Surface Laptop 4 also being able to explore my wife’s experience with a Huawei Windows laptop both devices with really high-end Intel i7 processors. Honestly and with all respect for all technology providers, I can only factually that I am extremely surprised by the “chip” characteristics of my Apple MacBook Air device. More specifically the M1 has longer capacity, requires less physical space and the heat output is just incredibly low compared to the other 2 devices carrying Intel processors which confirms to me why everybody tries to acquire ARM (see below).
Intel trying to acquire ARM together with Samsung & TSMC : after the failed 40BUSD acquisition attempt by NVIDIA of ARM, the largest chipmakers are ligning up in some kind of “unnatural” consortium to buy UK chipmaker ARM. Even Qualcomm is willing to join apparently the consortium together with Intel & Samsung. This unnatural consortium is happening because of the failed NVIDIA acquisition attempt which failed due to antitrust / market structure policy makers considering such an acquisition by NVIDIA to create a potential disbalance in the chipmaker industry.
What may be very positive for Intel in the future is that due to the geopolitical environment, the US government passed the CHIPS Act. The primary goal of the CHIPS Act passed by congress is to make the U.S. less dependent on semiconductor chips made in China and Taiwan hence potentially giving back implicitly to Intel some bargaining power with US and potentially EU companies. The current “military” uncertainty between China & Taiwan without wanting to take a stance on this subject but only looking at it from a business perspective for Intel can help Intel’s 5-10 year position as well.
Warren Buffett very often has mentioned that he needs to have reasonable comfort in how the industry / company he will invest into will look like in the future. Well personally I have no clue how the server, IoT & microprocessor industry will look like in 30 years time, not even in 10 years time. For other industries like food industry, consumer defensive articles I do not see huge disruptions coming but maybe I am wrong. The reason behind my uncertainty on the chip industry (if you allow me to aggregate Intel as being part of one vertical industry being the chip industry) is that currently there is a huge concentration of compute power that sits with the big Cloud hyperscalers like Amazon Web Services & Microsoft. Their purchasing power is huge towards server & chip suppliers. Even the development of edge offerings is driven by the hyperscalers as customers often look at Edge computing as an extension of their central hyperscale Cloud infrastructure hence the concentrated purchasing power of hyperscalers remains strong here as they develop their own edge computing searching for lock-in attributes (e.g. compatibility between core & edge). On top of this hyperscale Cloud concentration started around 7-8 years ago, since a couple of years huge investments are going into quantum computing and nobody knows which (materials science) technology will become the standard and who will win the race. The quantum impact is the most difficult to predict as so much uncertainty with even the possibility similar to Artificial Intelligence that Quantum would go into a Quantum winter. As a reminder AI technology had 3 AI winters until becoming mainstream since 2016 due to some fundamental technologies like storage & compute power becoming ubiquitous (low-cost & theoretically unlimited).

As a conclusion, I must say it is not an easy call to decide for me to invest into Intel or not. If there would be no other cheap opportunities on the market currently I would probably buy Intel very honestly (and again not a solicitation for you to do). Very realistically my call has been so far NOT to buy Intel as I have found stronger fundamentals in other companies that I had already been investing in the past where I revalidated my initial asusmptions and buying more of my companies in the portfolio at even deeper prices due to inflation & geopolitical uncertainties with for me at least a better perspective on “technology” leadership & uniqueness vs the Intel case.

I hope that this thought process is valuable for you and I do apologize at the same time if it is rather long but I consider this to be part of my sharing experience with you. Hope it helps and take care

Candi

Candi Carrera

Value investor & indep. board director

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