Thesis
I previously calculated a fair implied target price for Intel (NASDAQ:INTC) at around $26.94/share. And following another disappointing quarter from the chipmaker, the stock is trading very close to this level pre-market — at $27.16. However, on the backdrop of a lackluster 2023 outlook, and arguably also beyond, I cannot convince myself to upgrade Intel to a ‘Hold’. In fact, I now believe INTC stock should be valued at $23.5/share, an argument that is anchored on very likely further consensus EPS downgrades.
For reference, Intel stock continues to be a relative underperformer versus the broad market: for the trailing twelve months, INTC stock is down approximately 42% (not even accounting for the fresh pre-market sell off!), as compared to a loss of less than 7% for the S&P 500 (SPY).
Another Very Bad Quarter
Intel had quite a few bad quarters in a row now. And given what Intel CEO executive Pat Gelsinger described as ‘persistent macro headwinds’, Q4 was a mess too: During the December quarter 2022Intel managed to generate total group revenues of only about $14.0 billion, down approximately 32% versus the same period one year earlier (about $18.5 billion in Q4 2021). Notably, Intel’s sales number missed analyst consensus estimates by about $450 million ($14.5 billion estimated, according to data compiled by Refinitiv).
With regards to profitability, during Q4 2022, Intel recorded GAAP operating income of negative $1.05 billion, as compared to a proud $5.02 billion for the same period in 2021. With that frame of reference, Intel’s GAAP gross profit and GAAP operating income margin fell by an astonishing 14.5 and 32.4 percentage points respectively. GAAP Net income for Q4 was reported at negative $0.7 billion (-0.16/share), down 114% year over year.
The Pain Continues – Q1 2023 Will Likely Be Bad
If one thinks that Intel’s Q4 2022 was bad, which is certainly was in my opinion, then one should brace for the company’s Q1 2023 guidance: According to management expectations, revenues for the March quarter will likely fall between $10.5 billion and $11.5 billion, which could be as much as $3.5 billion below Wall-Street expectations ($14 billion)! Moreover, the company now expects to write a loss of about 15 cents, versus analysts having believed that Intel could achieve a 25 cents profit, according to data compiled by Refinitiv.
Although Intel did not issue guidance for the FY 2023 period, management hinted on the hope that conditions might improve in the second half of 2023, given the economic recovery in China as well as improving demand from corporations, who have likely rebalanced their inventories by then. While a somewhat agree with these expectations, I remain doubtful if, and to what extent, Intel’s financials are only pressured by cyclical demand fluctuations.
Its (Not Only) The Market
Although it is true that the market for Intel’s offerings is not very favorable at the moment, as we are currently experiencing a sharp downturn in the semiconductor industry. An arguably, as implied by Intel management commentary and Q4 results, the chip inventory correction as well as the plummeting demand for PCs is affecting the market even worse than initially expected.
However, investors should also consider that it is not ‘only the market/ macro’. Reflecting on the graph below, as provided by Bloomberg, Intel has consistently lost market share to the company’s biggest rival TSMC (TSM) — a chipmaker that is not doing as bad financially as Intel and a company that has received equity investments from Warren Buffett.
Valuation Update: Lower TP
On the backdrop of a softer than expected profitability outlook, I lower my EPS expectations for INTC in 2023. I estimate that INTC’s EPS in 2023 will likely contract to somewhere between $1.8 and $2. Moreover, I also lower my EPS expectations for 2024 and 2025, to $2.1 and 2.25, respectively.
I continue to anchor on a 0% terminal growth rate (I think I am generous here) and a 9% cost of equity requirement.
Given the EPS updates as highlighted below, I now calculate a fair implied share price for INTC of $23.50 as compared to $26.94 prior.
Below is also the updated sensitivity table.
Risks To My Thesis
As I see it, there has been no major risk-updated since I have last covered INTC stock. Thus, I would like to highlight what I have written before:
Firstly, the government support for the chip industry, as ‘Chips and Science Act’, could provide a fundamental tailwind to Intel and aid sentiment towards INTC stock. However, increasing government support in the form of ‘non-economic’ subsidies could also be bearish for Intel as competition increases.
Secondly, Intel generates about 90% of revenues from the PC and servers segment. Accordingly, a major global push on PC purchases could result in a significant upward revision of Intel’s EPS estimates.
Conclusion
Intel’s Q4 2022 performance was a bad. And the company’s outlook for early 2023 is even worse. With such a frame of reference, I argue Intel continues to be a value trap. Don’t let the 41% sell-off for the trailing twelve months fool you into believing the company is a bargain now. Intel has depreciated in value due to accurate financial consideration, in my opinion. In fact, on the backdrop of EPS contraction though 2025, I now calculate a fair implied share price for INTC equal to $23.5/share. Intel remains a ‘Sell’.