US Stock: Intel Corporation Aug 2015

Intel, Inc. (NYSE:INTC) is the world's leading semiconductor producer and has been the industry leader since the inception of the personal computer. Intel produces products for many facets of advanced technology including flash memory products, motherboards, wired and wireless connectivity products and networked storage products.

Stock Rating: MARKET PERFORM (HOLD)

Price: $28.92

Target price: $30.69  

based on Discounted Rate of 8%

Fundamentals: Long Term Market Perform (5-year period)

Fundamentals: Short Term Bearish (3-month period)

Risk Level: High

**Outperform: Stock expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Stock expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Stock expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.


If you want to skip all the below this is a good read if you have the time: Intel: Is There Hope For A Strong Future?

Financial Charts

Jan 2013: #1 Profit Margin (red line) for Intel is pretty decent on an average of 20%. I take into account cost for R&D as well as marketing to get the final tally of profit margin because they are still essential COST in order to run the business. Intel is smart at boasting about gross margin which is always above 55% for the last three years but what matters to me is profit margin.
Aug 2015: Intel has made effort improve the margin by 5% over the last 5 years (up from 17% to 22%). This is good.

Jan 2013: #2 ROA (green line) and ROCE (aqua line) looks fine. As long as they correlate with each other, Intel is using its available resources wisely.
Aug 2015: No change in my comment.

Jan 2013: #3 The jump in revenue growth rate (orange line) for 2010 is nothing special, first due to the recovery in demand from the global crisis and second because Intel has now monopolized the PC processor market thanks to AMD not wanting to compete head to head anymore. By looking at revenue figures of 2011 together with the upcoming 2012 expecting a revenue of $53.8 billion, market has saturated. Thus I am not expecting any MIRACLES to see a big jump in growth rates anymore.

Aug 2015: It came to no surprise that after the financial recovery the spike in growth will normalized. Worse still, Intel is expecting revenue for 2015 to be flat against 2014.

Jan 2013: #1 EPS is growing healthily though this again is highly dependent on Intel making more and more money. The other more sneaky way of improving this ratio without having to generate more profits is by exercising share buy backs, this is what Intel has been doing for the year 2012. Though share buy backs is a positive move as long as the company has a healthy cash reserve it is nevertheless not a better option compared to increasing revenue. Hence take it with a pinch of salt.
Aug 2015: EPS has been maintained at record high levels. The share buyback program has had an impact to up 2014. I have voiced my concerns about this before: US Corp Share Buyback - Double Edged Sword. Intel could have used the $$ in R&D or acquisitions.

Jan 2013: #2 DPS has been on the increasing trend. The payout is still affordable to Intel and the payout ratio is not alarming. Btw as a semiconductor company, Intel's attractive dividend yield of 4% is one of the best in the tech industry. Impressive move by Intel to attract or keep investors like institutional funds happy.
Aug 2015: No change in comment. However with revenue not increasing, DPS will eventually plateau.


Discounted Cash Flow Analysis
Projected Revenue Growth Rate: 0% (2015), 3%/each year for the next 5 years till 2020

Operating Costs: 78% (includes cost of goods, R&D and marketing)

Corporate Tax: 26% (based on annual report 2014)

Capital Expenditures: $8 billion +3%/year 

Depreciation: $5.0 billion +3%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 10%

**I use 3% is due to forecasted world GDP growth because semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.

Jan 2013:

Intel's fair value is priced roughly at $20.24. Push the revenue growth rate to 5% and you can value it at $21.01. The current stock price of $22.00 makes Intel within the fairly valued zone. Aboi still holds Intel being valued at most $25.00 (unchanged since my first analysis back in year 2010).

Aug 2015: 

Intel's fair value is priced roughly at $25.00. (back then projected revenue is to be around $62 billion by 2014, short of $6 billion now but thanks to better margins Intel has been able to maintain some free-cash-flow growth (FCF).

Comments

Intel desperately needs to find growth back, otherwise it is just a sitting lame duck. Data Center Group (servers) should continue to grow as the world needs more and more data and processing power. This will be Intel's domain for the foreseeable future. Mainstream PC sales (desktops and laptops) will decline further, suffering from competition on mobile where competition from ARM market is heavy and secondly margin is definitely thin. Intel's acquisition strategy is not yet very clear (purchase of Altera at $16.7 billion will take time to manifest). Intel's new memory tech with Micron is also too soon to tell. Benchmark numbers and more details are needed. I predict that Win10 will not help Intel that much. Reason being that for the first time Microsoft opted to let users try the new OS version for free - bypassing the need to acquire a new PC. Overall things are not so rosy - hence market perform on the long term. With looming US interest rate hike (equities value should drop) - hence the bearish rating for the short term. I hope you sold when Intel had the buyback fever 6 months ago, it was overvalued even by discounted cash flow calculations (now and back in Jan 2013). I did, all of them.

US Corp Share Buyback - Double Edged Sword

From The Economist Sept 13th - 19th 2014. My thoughts are in blue.
http://www.economist.com/news/leaders/21616950-companies-are-spending-record-amounts-buying-back-their-own-shares-investors-should-be

Companies are spending record amounts on buying back their own shares. Investors should be worried

FINANCIAL excess is more commonly associated with banks than with blue-chip companies. While the rich world’s finance industry—supposedly the brain of the economy—went berserk in the run-up to the 2007-08 crash, other big firms behaved sensibly, avoiding too much debt, keeping their costs under control and their eyes on long-term opportunities in emerging markets. But in the era of weak growth and low interest rates that has characterised the aftermath of that crash, there is growing evidence that the blue chips are engaged in their own kind of financial excess: a dangerous addiction to share buy-backs.

Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.

Intel also does buyback in the tune of $20 billion announced back in July 2014 (before the spike in share price) and expects to repurchase about $4 billion in shares in the current quarter. This amount is similar to IBM. Intel spent $10 billion in 2013 for research and development. 

Buy-backs are not necessarily a bad idea. When firms buy their own stock in the open market they return surplus cash to their shareholders, in much the same way as if they were paying out dividends. And if firms can’t find opportunities for profitable investment, handing cash back to investors is the right thing to do. In many ways the surge in buy-backs is a symptom of the rich world’s feeble growth prospects.

But it could also be a source of trouble, for two main reasons. First, both short-term investors and managers have incentives that could lead them to overdo buy-backs and neglect long-term investment projects. The announcement of a buy-back scheme can prompt a sudden spike in share prices and a quick buck for the short-term investor. By reducing the number of shares outstanding, buy-back schemes can also artificially boost a firm’s earnings per share. This helps explain why managers whose pay depends on reaching specific earnings-per-share targets like to buy back shares. We will never know as it is only disclosed privately.

Second, some firms may be borrowing too much to pay for their buy-back habit. American companies, if one includes their global operations as a whole, are only moderately indebted; record buy-backs are being paid out of record profits. But the overall figures are skewed by a few cash-rich giants, such as Google. In 2013, 38% of firms paid more in buy-backs than their cashflows could support, an unsustainable position. Some American multinationals with apparently healthy global balance sheets are, in fact, dangerously lopsided. They are borrowing heavily at home to pay for buy-backs while keeping cash abroad to avoid America’s high corporate tax rate. Intel borrowed $6 billion for the sole purpose of buying back shares. Though the DE ratio is at a 'not to worry' ratio of 0.227 as of writing, the intent borrowing to do this for the first time is worrisome.

Intel's 5 Year Per Quarter DE ratio: It will continue to grow as long as profits do NOT compensate for growing debt

Let's examine IBM's case where profits are not lowering down the debt ratio.

IBM's 5 Year Per Quarter DE Ratio: Ever growing. 2014 saw massive borrowings for buy back scheme.

IBM's 5 Year Per Quarter Gross Profit: Not affected by crisis but also NOT growing 

The difference between a growing business and not.

Intel's 5 Year Per Quarter Gross Profit: Grew when demand needed to replenish inventory during global recovery but relatively flat since peak of 2011

Costco's 5 Year Per Quarter Gross Profit: Ever growing PER quarter

Drawing a line
If firms are overdoing buy-backs and starving themselves of investment, artificially propped-up share prices will eventually tumble. That is why investors need to pay close attention. In the long term they need to ensure that bosses’ pay schemes are designed in a way that does not create a perverse incentive to repurchase stock. In the short term, they must give willing firms a licence to invest. There are some signs that this is beginning to happen. According to a poll by Bank of America Merrill Lynch, a record majority of fund managers now think firms are investing too little; only a minority want higher cash returns. That is welcome: shareholder capitalism is about growth and creation, not just dividing the spoils.

US Stock: Intel Corporation Jan 2013

Company Profile
Intel is still the biggest semiconductor company in the world. Intel has its Atom microprocessor for smart phones. There is a growing trend of mobile phones with internet access such as the iPhone, Android and BlackBerry. Intel plans to use its atom microprocessors to try to enter the mobile phone market industry. How has that been going? Let's take a look at the revenue breakdown from the Annual Report of 2011. 

• PC Client (desktop + laptop markets): $35.4/$54 =  65.55%
• Data Center (servers): $10.1/$54 = 18.70%, 
• Software (e.g. McAfee) = 3.46%. 
• This effectively means only ~12% is attributable to Intel Mobile Communications (IMC), the Intelligent Systems Group (ISG), the Netbook and Tablet Group (NTG), and the Ultra-Mobility Group (UMG). 

With PC sales being stagnant and losing ground (see graph and purple regions) to smartphones + tablets after 2011, market environment is tough for Intel to sustain revenue growth unless they start entering this new market more SERIOUSLY. This remains the biggest risk and turning point for Intel: Whether they can be relevant in the smartphones + tablet market.

Source: 2012 KPCB Internet Trends

Financial Charts

#1 Profit Margin (red line) for Intel is pretty decent on an average of 20%. I take into account cost for R&D as well as marketing to get the final tally of profit margin because they are still essential COST in order to run the business. Intel is smart at boasting about gross margin which is always above 55% for the last three years but what matters to me is profit margin.
#2 ROA (green line) and ROCE (aqua line) looks fine. As long as they correlate with each other, Intel is using its available resources wisely.
#3 The jump in revenue growth rate (orange line) for 2010 is nothing special, first due to the recovery in demand from the global crisis and second because Intel has now monopolized the PC processor market thanks to AMD not wanting to compete head to head anymore. By looking at revenue figures of 2011 together with the upcoming 2012 expecting a revenue of $53.8 billion, market has saturated. Thus I am not expecting any MIRACLES to see a big jump in growth rates anymore.

#1 EPS is growing healthily though this again is highly dependent on Intel making more and more money. The other more sneaky way of improving this ratio without having to generate more profits is by exercising share buy backs, this is what Intel has been doing for the year 2012. Though share buy backs is a positive move as long as the company has a healthy cash reserve it is nevertheless not a better option compared to increasing revenue. Hence take it with a pinch of salt.
#2 DPS has been on the increasing trend. The payout is still affordable to Intel and the payout ratio is not alarming. Btw as a semiconductor company, Intel's attractive dividend yield of 4% is one of the best in the tech industry. Impressive move by Intel to attract or keep investors like institutional funds happy.

Discounted Cash Flow Analysis
Projected Revenue Growth Rate: 4%/each year for the next 5 years til 2017

Operating Costs: 80% (includes cost of goods, R&D and marketing)

Corporate Tax: 24% (based on annual report 2011)

Capital Expenditures: $5.5 billion +4%/year 

Depreciation: $4.5 billion +4%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 15%

Intel's fair value is priced roughly at $20.24. Push the revenue growth rate to 5% and you can value it at $21.01. The current stock price of $22.00 makes Intel within the fairly valued zone. Aboi still holds Intel being valued at most $25.00 (unchanged since my first analysis back in year 2010).

This is how my custom made DCF model input table looks like (Part 1)

This is how my custom made DCF model input table looks like (Part 2). Fair value computed below.

Technical Analysis

Using VSA (volume spread analysis) technique, you can google it, I would say Intel is in an accumulation stage now where the price would hold roughly within the fair value. The accumulation stage is where market professionals would try to buy as much shares as they can, without SIGNIFICANTLY putting the price up against their own buying. I believe this would happen until the Q2'13 results are out (which is usually Intel's strongest quarter). The key indicator of this would be ultra-high volume leading to the mark-up stage. We will take a look again in a few more months. Btw I sold most of my holdings at $26-$27 region halfway during the distribution stage last year, so for now Aboi says:

Target price: USD21.01 HOLD
Fundamentals: Short Term Market Perform (1-year period)
Technical: Medium Term Bullish (6-month period)
Risk Level: High

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

Revisiting The Blue Camp

Seriously time flies in the tech world, in just a matter of months netbooks seems to decline while tablets and smartphones are picking up like hot cakes. In addition we can clearly see that Intel's Atom is not making inroads either in the Consumer Electronics (CE) market: smart TV.

Then we see that Intel's Ultra Mobility boss leaving the company after a long tenure of 24 years! With the growing interest of tablets and smartphones these days, long gone are the glory days of the Atom. Smartphone market is mostly dominated by ARM processors and the tablet market is going to be trampled by AMD's Bobcat fusion line of processors when they are finally out this summer'11 after some delay.

"AMD Brazos has been a big hit with OEMs as nearly every major manufacturer is producing machines based around it, particularly the extremely popular E-350 APU."

It is rather obvious that Chandrasekher had to go because of Intel's failure in the mobility segment of tablet/smartphone. Perhaps he was fired since the announcement made was so brief without much explanation. According to tomshardware, it wasn't even seven lines long. So much of disrespect for someone who has served Intel for so long.

So what is Intel going to do with Atom? Some of my thoughts:

• Heading towards making it more energy efficient and cheap to compete with ARM. "Moorestown" is rumoured to be offering a x10 power reduction during idle state.
• Bringing it into the low-power server space because ARM has openly said they are going up the pyramid and tackling low end/low power servers with its architecture. This has been confirmed recently. News here.
• Competing with Bobcat in which Intel responded a YES they can but with what? Lol. The current iGPU in Pineview is inadequate (fails @ HD flash and HD video encoding) and has been no word on further technical roadmap to combat AMD's upcoming and real threat.

Thus it remains extremely gloomy for Intel to penetrate yet another new market, they have to be content with their microprocessor product line which is doing very well (fast refresh), thank god they command this market strongly. Intel in this segment is a free frag until AMD's fusion Llano and Interlagos is out in Q3'2011 to provide some competition.

 

Though critics may argue that Intel in 2010 generated revenue profits, it did not translate to share performance, it is mainly due to low base effect in 2009. Low base effect in economics is the tendency of a small absolute change from a low initial amount to be translated into a large percentage change. I am certain that in 2011 it will not fair higher nor close to 2010 profit.

The last time (27 Nov 2010 posting) I placed a sell call near USD 21.50 was justified as the share is now at USD 20.37, a 5.2% depreciation while buy call for AMD has gained 20.32% from USD 7.38 to USD 8.88 (nice digits!)

I still maintain my sell call for INTC above USD 20 (and buy some other equity) and buy call for AMD as long below USD 10.

Here is my previous analysis on INTC: Blue Machine - Intel Corporation

Intel To Be Underdogs?

Introduction

The article is mainly about how AMD is going to make headlines for the year 2011 and 2012, more or less being critical to Intel though I feel Intel warrants such comments. If you are really an Intel fanboy I suggest you stop here.

While Intel is basking in its glory from the success of its Nehalem architecture processors, AMD is not quite ready to throw the towel. To those that do not know that AMD did kick Intel's butt once during the days of the Pentium4 vs old Athlon processors. Intel was advocating the Gigahertz factor with breakneck speeds while AMD decided to go with IMC (Integrated Memory Controller) to boost throughput. In the end, AMD finally won the design and snatched as much as 25% market share from Intel (a high at that point of time). 

Long gone are the days as Intel crawled back with their Core micro-architecture after copying AMD's innovation as usual...we see the same trend now as AMD with their acquisition of ATI 4 years ago mooted the idea of having CPU+GPU, hence the name Fusion lineup. Intel once again copied the idea for their SandyBridge product. AMD knew that they needed something that Intel does not have which is graphics thus they revised their strategy to compete. Though it was a heavy financial strain on AMD's part to obtain ATI, it has finally paid off as both companies are now integrated, going well and making profit after two years of being red.

In my opinion, Intel's glory days are gone as we head into 2011 and 2012 where AMD is poised to make a full comeback if not a grand one. Curious to know? Read on...first a little background check on financial.

Financial for YR2009

Sales for AMD comes in at $5.4bil while Intel has $35bil with gross margin at 42% vs 55%. With AMD spending $1.7bil in R&D and another $1bil for marketing, general admin stuffs they have minus net profit but turns positive after Intel paid $1.25bil in settlement agreement for malpractices. On the contrary, Intel spends $5.6bil on R&D and another $7.9bil on marketing and, general admin stuffs leaving only 16% net profit margin ($5.74bil).

Implication: Clearly Intel earning x7 as much as AMD though the latter is still able to compete with the big bully for many years since its establishment.

Intel sales can be broken into two main categories: PCG (PC Client Group) $20bil on processors and $6.2bil on chipset and mobos which totals in 75%. DCG (Data Client Group) with $5.3bil processors and chipset and mobos with $1.1bil amounting to the other 18%. International sales account for 80% of the sales with remaining 20% in America. Of that 80% international sales, 55% alone in Asia region. AMD on the other hand has Computing Solutions $4.1bil (76%) and Graphics $1.2bil (22%).

Implication: The mainstream market is the most profitable & biggest market of all as it accounts 75% for Intel and probably 60% for AMD.

Intel has said continuously that by capturing the top performance crown it will translate into capturing the low-end market but time and time again AMD has proven this wrong. Intel's strategy of embedding people's mind that they have the latest and greatest will spur the low end market in thinking that Intel is still more favourable is nothing more than a marketing gimmick. AMD has always been providing consumers with compelling performance/price ratio product and is still surviving these many years. Don't bluff us la Intel.

Thus for AMD to gain market share from Intel is by hurting them in the mainstream market whilst providing stiffer competition in the server market to keep Intel in check. Graphics is AMD's bonus as Intel has nothing to offer in this category.

Current Developments

AMD-ATI with their Fusion lineup has been doing a lot of PR campaign recently with their just recently concluded Analyst day. AMD's seed on APU (a combination of CPU+GPU) will bear fruit in 2011-2012 as their roadmap suggests product lineups across all segments of notebook, desktop and server. Their priority: simple at best: GPU > APU > CPU. Intel can only do CPU?

AMD will launch their low-end parts first in 2011, 9w Ontario single core & 18w Zacate dual core which are designed to compete with Intel's Atom and can even compete with Intel's mobile Core i3 and i5 parts in some cases. Obviously it made the Atom look smaller than an atom as the benchmarks will show you: AMD Fusion: Brazos Gets Previewed: Part 2, Performance. 

Some may argue that Intel will release something new to compete as their current Pineview products are out for quite some time. Do note that Pineview needs to pair with nVidia's Ion2 just to come close to AMD's offering. Intel with Pineview alone can't do it, more or less talk about their future offerings in this market category. AMD on the other hand has a complete platform to offer users.

To make the comparison easier I used a relative benchmark which is the PassMark Software. It is a benchmark that has delved into the thousands of benchmark results that PerformanceTest users have posted to its web site and produced four charts to help compare the relative performance of different video cards.

G3D Rating (higher is better) | Rank (lower is better)

GeForce9400M (Ion2) 139 | 504

Radeon HD5450 (Zacate & SandyBridge) 300 | 290

Radeon HD5570 (Llano) 752 | 110

Implication: Atom is as good as dead. If Intel's mainstream SNB can only offer gpu performance (as shown in preview benchmarks) near AMD's Zacate meant for Atom/CULV market then Intel is lagging behind a lot in the GPU realm.  

Llano is AMD's answer to the mainstream market. Intel's answer to that is SandyBridge but early benchmark shows that Intel's SNB graphics performance can only beat Zacate's Radeon HD5450 a little which surprisingly is for AMD's offering to compete in the Atom and CULV realm. There is still no preview benchmarks for Llano as of now but the graphics performance has been dubbed as being at the HD5570 region, awesome to say the least.

 

 

Now let's take a peek at the high-end market. I have doubts that Zambezi pure CPU cores can fight head to head with Intel's SNB as Intel has remained strong in the CPU realm for quite some time, but AMD is not putting focus to capture the halo like Intel. Heading to server side, AMD believes that customers are demanding more core counts, essentially more throughput per watt or throughput per dollar. Intel's SNB is currently reported to be in 8core/16thread region. Still early to say anything but AMD with the 6200-series (Interlagos), we are finally going to see AMD try and take the top spot for the server market in 2011. Interesting battle lies ahead.

 

Perspectives

Since my last sharing on The Blue Machine: Intel Corporation I have stated my less optimistic views on the world's biggest electronics company. Everybody knows that Intel has one of their best years in 2010 with record profits and beating AMD to their knees BUT did that translate into investor sentiment in share price performance?

Investor's Outlook: Investors are not stupid, one or two years of remarkable gains does not means it is something sustainable especially when future product lineups are not good enough to continue the momentum. Competition is heating up, after all AMD is offering features that Intel does not have expertise in for the first time: graphics. Thus this is why I think the share price has been subdued even with good news for Intel year long in 2010. Share price is not even bullish, it is stagnant ever since the tech bubble burst in 2000.

Consumer's Outlook: Wonderful! Product offering has never been this good. For the first time we will actually see discrete GPU performance in a single-chip CPU/GPU package. Expect to see price drops especially Atom parts as Intel can only fight with reduced prices. If AMD's APU proves to be successful do expect competitive prices for mainstream CPUs.

Employee's Outlook: Time to work your asses off LOL. AMD with x7 less headcount and money compared to Intel has fended off critics for years as they continue to offer products that can compete with Intel. Intel's focus right now seems to be on adjacent markets and trying to become a giant conglomeration like it tried during then-CEO Craig Barrett but failed miserably. I also expect bonus payouts not to be as much as year 2010.

Conclusion

These are my personal views, Intel's 2010 record profits are not surprising given two things. One they have monopolized the market while AMD is trying to play catch up after acquiring ATI. With their monopolization, they control pricing and did so to consumer's disadvantage. Intel's processors are damn expensive. Second, they force consumers to adopt new hardware famously done by them for many years through socket incompatibility. SNB is no different as they opt for LGA1156 vs the current Nehalem LGA1155 for mainstream. WTF just one pin!! They earn billions from this single modification via chipset and mobo sales.

I am not all critical to Intel as I still think they will have superior CPU processing as compared to AMD even though it has become a force to be reckoned with in GPU technology. There is a difference when AMD edge Intel last time with their Athlons. This time AMD is holding something which Intel is not competent nor has express great interest in striving for improvements. I am talking about graphics. If you don't believe me, be my guest to google it. Intel's integrated graphics processors thus far have been far from stellar performers since day 1 and the worse is that they are quite ignorant about it. My Atom netbook is doing nothing except downloading torrents because it simply sucks, slow as hell (even playing flash video) and regret purchasing it in the first place, nothing but a hyped product.

So who will pull off the APU upset?  The CPU champion, or the GPU grandmaster? I see the battle to be bloody in which it will boil down to marketing. AMD is going to need to convince system builders that good graphics performance is better than having an overabundance of processor horsepower. I am a part time PC Solutions Consultant where I have built 15 PCs this year alone and almost all have a need for a discrete GFX card for mediocre graphical performance to play 1080p HD movies like Avatar.

My views are that Intel is very much profit centric before customers. AMD on the other hand has been very friendly to consumers providing them with backward compatibility for their processors on old sockets and this time going to provide very good integrated GPU + CPU features with DirectX 11 as we head into 2011 and 2012. Intel is not going to support that until their next gen processors after SNB is out, very poor move Intel.

Top management in Intel has got it wrong. Controlling leadership does not mean you can win mainstream. Do you think that Ferrari can do good in mainstream if they got leadership in performance? With their headcount and $$, they should be investing in software development and GPU hardware. Google and Apple did it right because their apps are great (end-user experience) even though their hardware is just decent. Intel is the other way round, offering spectacular hardware with very little end-user experience. AMD drivers and GPU capabilities offers much compelling experience for users. How many times have you seen people say this.."aiyo my microsoft office is so slow, zip file takes too long, WMP loads my playlist too long?" Almost next to none. The usual is "Damn my PC can't play HD, my firefox lags, Facebook is slow". This is where GPU matters more than CPU.

I might be too harsh on Intel, some say too optimistic on AMD and pessimistic on Intel but to be honest I am trying to be realistic. You should already know that I am an avid investor, a PC system builder and also a consumer. Thus I truly believed that I am able to provide my readers with good views from all perspectives. Intel is as simple as whether you love it or hate it. To me I have more hates than love about it. AMD share has more upside potential. I will always continue to sell my Intel shares as I have been and continue to do so going ahead in 2011 and 2012.

The Blue Machine: Intel Corporation

Introduction
Some may have known that I have shared on Intel early in 2010 through email way before I decided to start this blog. Basically I am porting those info over here, updating them slightly with recent turn of events. What I shared at that time still hold true and I stand by my opinions.

• Intel is in a competitive business, it is sustaining itself not a growth company though it is trying to grow.
• Intel's future is uncertain in >3 years time frame as does all tech companies including Intel's competitors.
• Intel's share price is overvalued and overbought by investors.

Company Profile
Technology company and is the world's largest semiconductor chip maker based on revenue figures. It was founded back in 1968 as Integrated Electronics Corporation and is based in Santa Clara, California. The brand name Intel is synonymous with processors but Intel also makes motherboard chipsets, network interface controllers, integrated circuits, flash memory, embedded processors and other devices related to communications and computing. Intel has a long history so I won't bother to continue a grandmother story. 

Financial Charts

• Gross Profit is definitely good, boasting figures within 50% to 60%. With Intel being in a monopoly state for the processor industry this figure is to be expected just like Genting Malaysia.
• Return of Equity trends well with Gross Profit. ROE is the measure of how much shareholders get in return of their investment. It is by no means a measure of what you get in return in hand but at the perspective of the money already invested by owners for Intel to use.
• Revenue Growth Rate. Practically a zigzag over the last 10 years. If I were to compute average 10-year it is at 3.34% growth rate and the average 5-year is only a minuscule 0.90%! Don't believe? Below chart CAGR directly from Intel website from here. This is CAGR (red circle), a slightly different calculation compared to my average formula.

• Earnings Per Share another zigzag trend. Even an entrenched tech company like Intel does not hold a sustaining EPS. This is one reason why I shun away from investing in tech related companies. Again the same data from Intel Investor Relations site (pink circle), you can clearly seen EPS is in a downtrend over the last 5 years.
• Dividend Per Share is on the rising trend but what worries me is how Intel planning to sustain it when their EPS is not growing? Use their cash reserve?
• Data at this point is enough for me to identify a growth company or a sustaining company. I wouldn't want to go into more financial ratios. 

Earnings
Intel's core revenue comes from the sales of microprocessors. As much as 75% from microprocessors, chipsets designed for notebook, netbook and desktop computing market segments. The other ~18% comes from the server market or data centers segment. The remaining ones are from communication products, ultra-mobility segments and digital home.

Intel's Geographic Breakdown of Revenue

As you can see Intel is dependent on two things as their source of income: the continuous sales of their microprocessors in the consumer realm which is majorly in 50% Asia Pacific and 25% America. It doesn't matter what they do on the others (dan lain-lain) as they contribute very little to the overall picture. Intel's share performance will ultimately be determined by investor's sentiment towards their main source of income. 

Competitors
Truth to be told, Intel has many competitors but I am looking at their main rivals, easier. In fact Intel also competes with Texas Instruments and Samsung Electronics if you don't know.

1. AMD-ATI is a solid partnership. They have given up the fight for the halo processor crown but now trying to move the market by promoting a complete set of processing & graphical power. This is an attempt to hit Intel technically where they are weakest. So far it has been quite successful in eating Intel's laptop market share. AMD is doing very well in the graphic segment as well by punching Nvidia right in the face where ATI released new graphics line up 6 months ahead of Nvidia. AMD is playing a different ball game by introducing Fusion lineup in 2011 to OEMs. They call it APU (accelerated processing unit), CPU + iGPU. It could well out-do whatever Intel has in 2011. Intel is infamous for the poor quality of its integrated graphics processors (IGPs). Being a person who customizes PC for people I can testify that.
2. Nvidia. Apart from graphics which they are fighting ATI is NVIDIA's upcoming x86 CPU + GPU combination. That device is still just a secret project which almost nothing is known or publicly announced. The idea is that all you need is a basic x86 processor to make an interface to standard software then push heavy calulations to the GPU. Again this is an area of software and graphics which Intel does not have any advantage.

DCF Valuation

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to DCF Analysis and spend some time understanding it.

I have estimated that Intel's revenue growth rate is at 1% per annum in the next 5 years, with 75% operating cost margin, 31% US corporate tax, capital expenditure of USD5 billion per year (based on historical figures) for the next 5 years. Having computed all these factor in, Intel is valued at USD18.25 taking into account a 10% discounted rate (safety of margin). Even if Intel has a revenue growth rate of 10% it is valued at only USD22.90. Nevertheless I still hold firm to my valuation that Intel is not worth more than USD20 simply because it is not growing fast enough, look at the data. Then why does Intel trade at over USD20 when times are reasonable good?

This is my theory...

It is quite true at least in the Malaysian market. I have limited know this and that in US market I will admit that. Intel's free float is only 35% and most of the holdings are being held by financial institutions and mutual funds in the United States (65%). These institutions are still clinging on to Intel thus supporting the share price from further weakening or more appropriately trading at its fair value. The only reason why I see them holding is because Intel pays dividends and their payout has been steady throughout the last 10 years. A fund that boast that it has Intel shares that pays reasonable dividend each year will make most people who owns the fund go WOW. And why would they let go if Intel continues to pay decent dividends for a tech company.

Intel Corp Major Holders

Another thing to note, insider transactions reported over the last two years @ Intel Insider Transactions. Look carefully and you can ascertain that officers and directors of Intel Corp are disposing their shares more than exercising them. If Intel is doing as great as reported by them why are they disposing them most of the time? Think about that.

What Do I Think?

No doubt Intel is enjoying a honeymoon & a commanding period now with their Nehalem family of processors but that will not last long. Competition will heat up in 2011 when AMD-ATI launches their Fusion lineup (Bulldozer and Bobcat). Graphics has been an important component in the PC industry and one that Intel in my opinion is underestimating it severely. Intel knows that graphic performance is their Achilles heel but they do not seem to invest much in that realm even though they have such a strong balance sheet.

Gods know what they are thinking. Back during AMD Athlon years early 2000s, AMD was pursuing throughput performance while Intel was still advocating the Gigahertz factor. In the end, AMD was proven right as their lower freq processors consistently outperformed Intel's red hot high frequency processors and thus gained more market share from Intel. Is Intel making another mistake by overlooking this new fusion innovation by AMD?

It could also very well be Deja Vu. Back in the early 2000s when then-CEO Craig Barrett attempted to diversify Intel beyond semiconductors but proved ultimately unsuccessful. CEO Paul then reorganized the company to refocus its core processor and chipset business on platforms but right now we see the same thing happening again, an attempt to diversify beyond just a chip maker. Will it work? Intel seems to know nuts about software division but is extremely good at hardware and manufacturing.

Intel's Diversification Business Model

The recent announcement to buy McAfee at USD7.68 billion, a 60% premium to the share was chosen on the expensive side. Buying at USD44 per McAfee share is outrageous! That share price hasn't approached that level except during the tech bubble in 1999. Intel has about $18 billion in cash and short-term investments but to waste it on a business that has no synergy with Intel baffles investors. As mentioned before, investors will punish Intel share and they did. Makes me wonder whether buying McAfee will benefit Intel in the long run. A company like Microsoft, IBM or Oracle would be a better choice for McAfee.

Intel Share Price Historical Performance, Year 2000 tech bubble burst

Other Fun Facts

1. Headcount at 80,000 (55% employed in the US). Intel has reduced it from a high of 100,000 five years ago. Intel is improving efficiency and productivity to improve their margins.
2. HP and Dell are Intel's biggest customers accounting a combined 30% of yearly revenue. If you see them reporting sluggish sales expect Intel to be in the same condition.
3. Apple will not drive Intel's sales by a big portion as it only accounts 5% of world PC market share.
4. Intel's likes to show off their high gross profit margin >50% but their net profit is below <20% thanks to big budgets in R&D and sales & marketing.
5. Intel spends as much in R&D as with sales & marketing except in 2009 where R&D is $5.6 billion while marketing is $7.9 billion.
6. Intel admits that they operate in intensely competitive industries, and failure to respond quickly to technological developments and incorporate new features into their products could harm our ability to compete (from 2009 annual report pg22).

 

The PE is low at 11 but I do not value Intel solely on this valuation. I will continuously sell off INTC shares and put the capital in other stakes which generate better returns and more predictable business model. My previous sell offs were at USD20.70 and USD24.15.

 

The blue machine is no longer a mean one but still is a force to be reckon with for their size and monopolization of the chip business. It has the financial strength and resources to turn things around if only they use it wisely.