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Has Intel Lost Its Position As A Wall Street Darling?

Intel’s stock plunged 16% right after their release of their Q2’2020 earnings results. In addition to that, Apple also decided to end their 15 years partnership with Intel!

In their Q2’2020 earnings call, Intel announced the delay of their 7nm chips by about 6 months. With their rival AMD already selling their 7nm chips in the market, Intel is no longer the market leader in technology.

Another point to note in Intel’s Q2’2020 earnings call is that total revenue in the 3rd quarter of 2020 is expected to drop 5.16% vs same period last year. Again, not a favorable sign for this ex-Wall Street darling.

These are all the headlines that caused Intel’s share price to plunge. Now, let’s take some time to look into a little further beyond the headlines.

HOW DOES INTEL MAKE MONEY?

Intel is the world leader in manufacturing semiconductor chips. It is also the inventor and dominant supplier for x86 series microprocessor for PC. In essence, any companies that run on PC processors is highly likely to be part of the ecosystem that Intel created.

Intel has also recently had good growth in their data centre business, which has contributed to almost 50% of its total revenue.

WHAT IS ONE THING UNIQUE ABOUT THIS COMPANY?

Intel is a semiconductor company that follows an “Integrated Device Manufacturer” model. This means that Intel has the capability to design, manufacture and package the chip in house. This allows Intel to provide an end-to-end solution to their customers.

REVENUE TREND

Revenue has been trending upwards and showing positive growth for the past 5 years.

Data Centres revenue covers 33% of the 50% Data-centric (DC) generated profit. This shows Intel is in a good direction for growth as, based on recent global research on data centric industries, the DC market is likely to grow for at least for the next 2 decades.

EARNINGS PER SHARE TREND

EPS is mostly showing positive and uptrend. The spike from 2017/18 is due to the inflow of DC growth.

Based on above, the company is growing at ~10% which qualifies it as a mature/stable company. Intel is a huge company, and this makes it hard to maintain a high growth rate. Nevertheless, we should be a wise value investor and be wary of falling into value trap.

WHAT HAS IMPACTED THEIR PERFORMANCE RECENTLY? (BASED ON THE LATEST QUARTERLY REPORT)

As the world currently grapples with the Covid19 pandemic, Intel has been no exception. Intel addressed their impact and response to the Covid19 situation in their Q2’2020 quarterly report released on the 24th July 2020. In the report, Intel’s leadership team declared that their top priority remains protecting the health & safety of their employees.

With Intel’s factories continuing to operate world-wide, and existing Business Continuity Programs in place for back up, Intel does not foresee any big roadblocks to their operations and supply chain functions even in this pandemic.

Total revenue for the quarter was up by ~19.4% y-o-y as its’ data-centric businesses and PC-centric businesses grew 34% and 7%, respectively. PC-centric business was up, driven by strong performance in notebook platform demand, strong platform ASP (Application Service Provider), higher modem and Wi-Fi sales; while being partially offset by lower desktop pricing.

Both segments’ revenue increase, has led to an increase in gross margin & operating income.

In the first 6 months of the year, Intel generated a Free Cash Flow (FCF) of $10.6b (almost 50% more than the same period last year), it has returned $7.0b to shareholders, comprising of a $2.8b dividend and $4.2b in Q1 2021 share buybacks.

In my opinion, Intel’s share price plunge was a result of the torrent of bad headlines impacting at the same time. Nevertheless, the underlying business is still in good shape based on the Q2’2020 earnings report.

In addition, with Intel’s recently launched Intel Tiger Lake processor (claimed to be equally powerful with AMD’s 7nm technology), Intel may have some ammunition to fight the AMD threat. Many IT enthusiasts are keenly waiting to put those claims to the test.

Finally, recent observers of Intel’s shares will note that, post July; the share price has been heading back up. For now, we only need to wait for the Q3 earnings result to confirm that Intel is indeed not losing it value, and that they are committed to driving their focus back to their core strengths.

Check out our deep dive on the Semiconductor industry, Nvidia, or Taiwan Semiconductors.

DISCLOSURE

The above article is for educational purposes only. Under no circumstances does any information provided in the article represent a recommendation to buy, sell or hold any stocks/asset. In no event shall ViA or any Author be liable to any viewers, guests or third party for any damages of any kind arising out of the use of any content shared here including, without limitation, use of such content outside of its intended purpose of investor education, and any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages resulting from such unintended use.

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