Semiconductors company Intel stunned Wall Street today as it surged to $42.28, marking a 4.1% change compared to the S&P 500 and the Nasdaq indices, which logged -0.0% and -0.0% respectively. INTC is 24.94% above its average analyst target price of $33.84, 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 shares have outperformed the S&P 500 by 28.0%, with a price change of 43.0%.
Intel Corporation designs, develops, manufactures, markets, and sells computing and related products worldwide. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Intel does not release its trailing 12 month P/E ratio since its earnings per share of $-0.39 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for INTC of -108.4. Based on the company's positive earnings guidance of $1.75, the stock has a forward P/E ratio of 24.2. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Intel's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 9.1 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Intel's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 54,044,000 | 33,363,000 | 38 | -11.63 |
| 2022 | 63,054,000 | 36,188,000 | 43 | -21.82 |
| 2021 | 79,024,000 | 35,209,000 | 55 | -1.79 |
| 2020 | 77,867,000 | 34,255,000 | 56 | -5.08 |
| 2019 | 71,965,000 | 29,825,000 | 59 | -4.84 |
| 2018 | 70,848,000 | 27,111,000 | 62 |
- Average gross margin: 52.2 %
- Average gross margin growth rate: -7.7 %
- Coefficient of variability (lower numbers indicating more stability): 15.3 %
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 Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 9,756,000 | 26,299,000 | -16,543,000 | -75.78 |
| 2022 | 15,433,000 | 24,844,000 | -9,411,000 | -187.76 |
| 2021 | 29,456,000 | 18,733,000 | 10,723,000 | -50.37 |
| 2020 | 35,864,000 | 14,259,000 | 21,605,000 | 27.6 |
| 2019 | 33,145,000 | 16,213,000 | 16,932,000 | 18.81 |
| 2018 | 29,432,000 | 15,181,000 | 14,251,000 |
- Average free cash flow: $6.26 Billion
- Average free cash flow growth rate: -16.1 %
- Coefficient of variability (the lower the better): 195.3 %
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 2.4% 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 1.75, 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.
Since it has a negative P/E ratio, a lower P/B ratio than its sector average, a deteriorating pattern of cash flows on a downwards trend, Intel is likely overvalued at today's prices. The company has poor growth indicators because of a negative PEG ratio and average net margins with a negative growth trend. We hope you enjoyed this basic overview of INTC's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
