Intel (INTC) has been an out of favor stock for over a year now. The company’s share price had a recent peak in April 2021 at $68 and is now trading around $27. This is quite the move for a large cap stock, let alone one of the largest semiconductor companies in the world. Intel designs and manufactures CPUs and other integrated circuits for PCs, data center, AI, and autonomous vehicles.
One of the main reasons Intel has sold off is due to their inability to manufacture the cutting edge transistors. This has led to their competitor AMD to gain market share since they utilize Taiwan Semiconductor to manufacture their chips. Additionally, demand for semiconductors have recently softened, which has led to most semiconductor stocks to face drawdowns. Given all this negative sentiment around Intel, I decided to perform a rough valuation to see if it is a candidate for my portfolio.
The valuation approach I will use is a simplified “earnings power” valuation from Bruce Greendwald’s valuation book. The first step is to figure out a reasonable steady state revenue. In 2021, INTC did $79B in revenue, which is an all time high. However this year Intel has lowered their guidance, estimating revenue coming in around $65B. Using this year’s guidance, plus the last four years of revenue, Intel’s average revenue comes to $73B, which I will use for this analysis.
Next is operating margins. Over the past 10 years, Intel operating margins have hovered between 33% and 25%. For this analysis I’ll use 30% as a steady state operating margin. This produces $21.9B in operating earnings based on my $73B revenue figure.
Greenwald’s earnings power valuation uses an after tax earnings. Philips typically pays an effective tax rate of around 20%. This tax rate applied to the $21.9B in operating earnings produces an after tax earnings of $17.52B.
The next step is to capitalize the after tax earnings with a reasonable cost of capital to arrive at the estimated enterprise value. Looking at historical P/E ratios, INTC has varied between 18 and it’s current value of 6. Seeing that Intel is a large cap stock with strong earnings, but still rough around the edges, I think a 7% cost of capital is reasonable.
By dividing the cost of capital by the post-tax earnings, we get the enterprise value of the company. Capitalizing the $17.52B in earnings by 7% produces an enterprise value of $250.3B. INTCs current enterprise value is around $120B. From these rough calculations, it appears there is a margin of safety in Intel’s shares.
Since Intel looks promising, I’ll go ahead and calculate the estimated fair value of its shares. To go from enterprise value to equity value, first the cash balance of $28.4B is added back. Next, the short and long term debts are subtracted, which are currently $4.6B and $33.5B respectively. This produces an estimated equity value of $240.6B, and dividing by 4.09M shares outstanding produces a share price of $58.80.
Since Intel definitely looks cheap on paper, I want to continue to do more due diligence. One thing that is concerning is Intel’s inability to produce the cutting edge transistors, thus losing market share. I would like to study the issue more and see if Intel has a chance of regaining superiority in CPUs. Additionally, I’ve heard Intel is slated to spend a large amount of money on capital expenditures. I would be interested to know what all that money is going towards, and whether it will produce much growth for the company. Intel definitely has some challenges ahead, but the stock price does seem compelling as long as the fundamentals do not deteriorate significantly in the future.