Intel (INTC)

I like buying into a beaten-down company. One that has had issues that leave it unloved by investors, sending the share price into oblivion. It’s happened to the best of them at one time or another. Facebook, Netflix, and even Apple have had moments in that last decade where no one wanted a bar of them. But as with any well-run company with a strong brand name they almost always come bouncing back. And if you pick up the shares when they are in the bargain bin there are sizable profits to be made.

Intel is such a company at the moment. In the recent past it has been the undisputed leader of the chipmakers, responsible for the direction and ultimate success of the PC industry as it grew to become the behemoth it is today. However, it has lost its way in the last few years to a point where its competitors have caught up and are on an even keel with the giant. It’s been a concerning time for shareholders and the share price has been destroyed accordingly.

The setbacks have been numerous. From suffering manufacturing issues when it tried to rush through its new line of technology. To Apple moving to make its own chips to support its line of Macs. It has gotten to the point where Intel now relies on its competitors to help in manufacturing some of its products. Taiwan Semiconductor, for example, is a rival who currently manufactures on behalf of Intel and whom it is rumoured will be employed to do a whole lot more in 2021.

Intel, however, points out that this is just the changing dynamics of its business and the industry as a whole. In the last earnings call of 2020, CEO Bob Swan proclaimed ” Now we have more flexibility in whether we make or buy, or whether we make for others. Many of our future products can no longer be described as manufactured inside or outside or as being a large-core or a small-core product. These products will take advantage of hybrid architectural approaches and the universe of IP deployed both inside and outside the walls of Intel.”

Effectively Intel will focus on the designs of its new chips, which has long been its specialty and leave the manufacturing to where it is best suited. Whether it is done in house, by fellow manufacturers, or some sort of hybrid between the two. It’s a great way to stay flexible in an industry that is constantly changing.

Apple leaving to do its own thing has been a hindrance to Intel but the damage has been exaggerated. The PC sector is much more important to the chipmaker. It has been the company’s bread and butter for decades now. In 2020 Dell accounted for 17% of Intel’s revenue, with Lenovo accounting for 12% and HP inc for another 10%. Demand for semiconductors was well down during 2020 as the pandemic slowed the purchase of new PC’s from businesses who were shut down. This is expected to bounce back in the back half of 2021 as companies move back into their workspaces and old computers need to be replaced.

While the Intel share price fell 13% in 2020, and at times losses were much larger than that, the financials did not show a company in trouble. In its latest earnings announcement, it showed a smaller decline in revenue than expected, and full-year revenue of $77.9 billion. That was up by 8% on the 2019 figures. In the earnings call it announced it had initiated production of its new generation of processors during the quarter and would ramp up production in the current one.

Incoming CEO Pat Gelsinger announced, “I am confident that the majority of our 2023 products will be manufactured internally. At the same time, given the breadth of our portfolio, it’s likely that we will expand our use of external foundries for certain technologies and products. There is an enormous opportunity ahead for Intel, but to be able to seize these opportunities, we have to deliver the best products and stay ahead of our customers’ needs.”

Things are changing at Intel. New management, new processes and new products. Yet the share price is valued for failure. If anything goes right for Intel the stock will be heavily undervalued and the share price will jump accordingly. At worst, they will continue to be a strong player in the market with a decent amount of market share. At a p/e of just 12, the good news is it would take a disaster for things to go much lower. The upside, however, if Intel can manage to leverage its name and experience, is that it claws back lost market share as its new products come on board. I don’t think Intel is finished with just yet. With a current share price of $60, I can easily see a move to $70-$80 and maybe even further. It will be a great buy on any dips.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.