Semiconductors company Intel stunned Wall Street today as it surged to $35.28, marking a 4.0% change compared to the S&P 500 and the Nasdaq indices, which logged -0.0% and 0.0% respectively. INTC is 23.53% above its average analyst target price of $28.56, which implies future downside for the stock. Indeed, the average analayst rating for the stock is hold, showing a rather gloomy outlook. Over the last year, Intel has underperfomed the S&P 500 by 28.0%, moving -12.3%.
Intel Corporation designs, develops, manufactures, markets, and sells computing and related products worldwide. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.
The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.
Intel does not release its trailing 12 month P/E ratio since its earnings per share of $-0.7 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for INTC of -50.4. Based on the company's positive earnings guidance of $1.63, the stock has a forward P/E ratio of 21.6. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Intel's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 16.37 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on INTC's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 63,054,000 | 36,188,000 | 42.61 | -23.16 |
| 2021-12-31 | 79,024,000 | 35,209,000 | 55.45 | -1.0 |
| 2020-12-31 | 77,867,000 | 34,255,000 | 56.01 | -4.35 |
| 2019-12-31 | 71,965,000 | 29,825,000 | 58.56 | n/a |
- Average gross margin: 53.2 %
- Average gross margin growth rate: -7.6 %
- Coefficient of variability (higher numbers indicating more instability): 13.5 %
We can see from the above that Intel business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Intel's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 15,433,000 | -25,050,000 | -9,617,000 | -199.53 |
| 2021-12-31 | 29,991,000 | -20,329,000 | 9,662,000 | -53.84 |
| 2020-12-31 | 35,384,000 | -14,453,000 | 20,931,000 | 23.62 |
| 2019-12-31 | 33,145,000 | -16,213,000 | 16,932,000 | n/a |
- Average free cash flow: $9.48 Billion
- Average free cash flow growth rate: -28.2 %
- Coefficient of variability (the lower the better): 143.1 %
The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. A negative cash flow is common, even among successful companies. But if INTC's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 4.3% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Intel's P/B ratio is 1.5, indicating that the market value of the company exceeds its book value by a factor of more than1, but is still below the average P/B ratio of the Technology sector.
As of first quarter of 2023, Intel is likely fairly valued because it has a negative P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows that are on a downwards course. The stock has poor growth indicators because of its average net margins with a negative growth trend, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into INTC's fundamental values -- especially their trends over time.
