Hey guys.
I’m bringing you the first in a series where I plan to review stocks in depth talk about why I’m bullish or bearish on certain companies. Voila, the stock snippets series is born!
Before we get started, I want to share a disclaimer. I am not a financial advisor, and this content is for entertainment and educational purposes only and is not financial advice nor is intended to be interpreted as financial advice in any form.
Alright, let’s get started. The company that I want to review first is Intel (INTC). I’m bullish on the long-term prospects of the company and I’m going to detail the reasons below.
Brief Background:
Intel’s core business focuses on the manufacturing of semiconductors for a variety of different products. Intel’s stock price is currently $55.91 per share and the stock yields a 2.48% dividend. Here’s a snapshot of the company’s financial overview from Yahoo Finance as of June 26th.
Reasons why I’m Bullish:
- Intel is in an industry with a lot of demand and positive momentum
Intel’s primary form of revenue comes from manufacturing devices called semiconductors, which are the technological backbone for all kinds of products from phones, electric computers, and even things like cars and electric toothbrushes. Semiconductors will power the future technology of the world and are currently powering the device that you’re reading this article on.
Semiconductor manufacturing is a high-cost and large moat industry, where the competition is highly skilled and competitors have a hard time breaking through. There are only a few companies in the world that do it and can do it well at scale because manufacturing these devices involves billions of dollars of capital, and billions of dollars in ongoing facility investment to keep facilities state of the art.
The industry itself is booming. With the economy reopening after the global pandemic, there is currently a semiconductor supply chain shortage. This shortage is putting a supply constraint on the market of many different products, driving the cost higher as the supply gets thinner. Just to give one example , companies like Ford (F) and General Motors (GM) are projecting to lose billions of dollars in revenue opportunity over the next few years, because they need semiconductors to complete the manufacturing of their cars. It’s always a good thing when you’re in an industry where there aren’t enough of the “things” that you make to go around. Everything you make will get used up.
2. Steady historical growth, deceivingly high market penetration
If you watch and read financial news regularly, you would think that Intel is falling apart. They recently traded out their CEO for a new one and announced a $20 billion investment in new manufacturing facilities in Arizona under mounting pressure to propel the business forward. Over the last few years, the stock price hasn’t done much in comparison to the S&P 500 or its peers.
The difference is especially pronounces in the last few years. This chart below shows Intel’s stock price relative to the S&P 500 benchmark for the prior three years.
- Total Return (minus dividends):
- VOO: +55.53%
- INTC: +8.84%
However, this stock price underperformance has happened while Intel’s revenue has been steadily growing. The graph below illustrates all of Intel’s revenue segments and highlights the slow but consistent growth of the top line.
The company’s net income doesn’t provide the same slow climb upwards, but Intel’s income has also increased in since FY2014. It looks funky, but the company’s net income has basically doubled since FY2014.
One other thing that surprised me during my research of Intel is the market share that they have in the semiconductor manufacturing space. They are the number one player in the space in terms of semiconductors by revenue. Intel does not seem like the largest semiconductor player in the game based on the coverage it gets, but it’s still number one. Instead of trying to fight to gain market share, they have to fight to maintain market share, which is a bit easier to do. Below is the top ten list of semiconductor manufacturers by revenue in 2019 and 2020.
3. The stock is really cheap compared to the market and the industry
While the stocks of the semiconductor industry and companies adjacent to semiconductors have skyrocketed over the last few years, Intel has lagged far behind.
Below, you can see a graph that shows the price to earnings ratio of many companies in the semiconductor space. Intel has the lowest P/E ratio of all of them.
While the photo below is taken from January and TSMC is missing, I still like it because it highlights how cheap Intel is relative to its peers.
One common form of investment analysis involves comparing companies to peers in their space. I want to compare Intel to one of its rivals, Taiwan Semiconductor Mfg. Ltd. (TSMC) to see how it stacks up.
Taiwan Semiconductor (TSMC), has seen its stock price increase twelve-fold from 2010 to present day, while Intel has only doubled by comparison during that time frame. TSMC also currently trades at a price to earnings ratio of about 31, compared to Intel’s 12.57, almost triple the valuation per the same dollar of earning power. Analysts project Intel’s earnings to decline in the upcoming fiscal year which may explain these numbers, but if you look at the last five years the two companies’ growth rates really aren’t that different.
I pulled the revenue, as well as net income for each company for the last five years to compare their growth rates. I also pulled the price to earnings ratio and the price to earnings growth ratio. You can find these details below.
As you can see from the data above, Intel performs just fine in comparison to TSMC. In fact, over a five year horizon, Intel actually has a higher average annualized net income growth and has earned billions more dollars than Taiwan Semi. However, despite this, the market capitalization of TSMC is about double that of Intel’s, despite significantly less revenue and earnings that are growing, but have only underperformed Intel’s in the last three years.
4. Mobileye – the high-powered growth engine hiding under the Intel umbrella
Another reason why I’m positive on the company is because of an acquisition they made in 2017. Mobileye is a company that specializes in Autonomous Driving technology and Advanced Driver Assistance Systems (ADAS). What does that mean? In short, they supply the technology used for autonomous and self-driving cars.
Mobileye uses a method called “lidar” to support its self-driving technology. While Elon Musk famously dissed lidar technology in 2014, saying anybody who relies on lidar is “doomed,” recent improvements in cost to use lidar systems in autonomous cars have made their use-case more realistic. In fact, Xpeng (XPEV) and Nio (NIO) both use lidar-equipped cars for autonomous driving.
Mobileye is growing its revenue dramatically. The company increased its top line from $374 million in FY2018 to $976 million in FY2020.
As the growth market for EVs and autonomous cars is set to grow for the next 30+ years, Mobileye’s ~$1B revenue will undoubtedly increase with the market. According to Mobileye’s website, 60 million cars are already equipped with their lidar technology.
Take a look at this graph below from Bloomberg NEF that illustrates the future growth of the industry. I circled 2021 to highlight how close to the beginning of the exponential growth curve we are in this space, which shows Mobileye’s potential.
If my mega simplified and assumption based back of the envelope math checks out.. If Mobileye is doing almost $1 billion in FY2020, then they would have revenue of at least $20 billion annually by 2040 if you increase their revenue in proportion to the cars in the above graph. Again, this assumes there’s no new products at all from Mobileye, or any other new revenue growth strategies at the company.
All of this momentum, value and growth, in addition to a stealthy hyper-growth business that’s available under the umbrella of a company whose price to earnings ratio is only 12.57? I’m willing to make that bet.
Closing Thoughts:
I’ve shared my thoughts on Intel stock and have discussed why I like it. I think it’s undervalued in comparison to its peers, will benefit from a market that has strong demand, and has a hyper-growth company under its wing set to explode in the years to come.
So what do I expect from it? To be honest, In the short-term I don’t expect too much on the upside in terms of Intel’s stock performance. They are set to invest $20 billion on new chip manufacturing initiatives in Arizona and saw a CEO change this year. The company needs to earn back the trust of its shareholders and prove that it can compete against other players in the market who have seen phenomenal growth. Intel has lost a lot of market share to its competitors over the last few years, but there’s reason to bet on the upside of the company.
I laid out all of the reasons why I like Intel moving forward, but I’m sure there can be a convincing bear case made for the stock as well. This is just my analysis and opinion of the stock – and again, is for entertainment and educational purposes only – not financial advice.
This article took me a lot of time to make, so if you appreciated this analysis please leave a comment with your thoughts and consider sharing with a friend, or reading other content on my blog. If you liked this, I will be happy to do similar analysis of other companies.
Until next time, happy investing!
Roth and Roll Finance 