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Is a Good Idea to Invest in Intel?

Read us and find out if is still a good idea to Invest in Intel

Intel is the world's largest manufacturer of microprocessors, the central processing units of PCs, and it also produces other semiconductor products.


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The Business


We see sales declining 5.6% in 2021 and 1% in 2022. Sales rose 2% in Q2, led by growth from Client Computing (up 6.5%), Internet of Things (up 47%), and Mobileye (up 124%). Although the Data Center Group (DCG) fell 9%, partly reflecting tough comparisons, it grew 16% sequentially, aided by a new server cycle and recovery on the Enterprise side while cloud spend remains elevated. INTC is benefiting from robust PC sales (units up 33%), but we note less favorable pricing and are concerned about the trajectory of demand in 2022. While we acknowledge market share loss, we think its XPU strategy and foray into GPUs bode well for the firm. We see a gross margin of between 56% and 57% in both 2021 and 2022, below the 57.6% margin posted in 2020. We note manufacturing ramp headwinds and average selling price declines due to competitive pressure. However, tailwinds include the exit of INTC’s NAND memory business, while DCG pricing should improve in the coming quarters. We see free cash flow of $10 billion in 2021 ($21 billion in 2020), assuming a capital spending run rate of roughly $20 billion ($14.3 billion in 2020), reflecting the higher spending needs as INTC looks to execute its foundry strategy.


Investment Case


Our Hold opinion reflects our view of valuation coupled with concerns about competitive pressures as well as foundry expansion plans. Earlier this year, INTC announced the creation of Intel Foundry Services, which includes a $20 billion investment to build two factories in Arizona. We view the foundry opportunity as massive, with an estimated $100 billion addressable market by 2025 and believe it will benefit from the desire for a non-Asia footprint by U.S./European governments and corporations. While INTC’s foundry expansion strategy will support higher revenue/volume, it would come at the expense of lower corporate gross margins and pressure free cash flow. We remain cautious about the more intense competitive landscape with AMD and potential share loss on the CPU server side. Risks to our opinion include slowing growth in emerging markets, an inventory correction, faster price erosion due to product mix, and greater competition from Advanced Micro Devices.

Our 12-month target price of $65 is based on a multiple of 13.5x our 2022 EPS estimate of $4.75, below peers, given our concerns about competitive pressures, high exposure to the PC space, and recent execution issues

Our risk assessment reflects Intel’s exposure to the semiconductor industry’s sales cycles and demand trends for personal computers, offset by its large size, long corporate history, and low debt levels compared to peers.


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+Our 12 .500% Return Quant Algo since 2006 for your Trading Strategy.


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