One of the biggest losers as of today's evening session is semiconductors company Intel, whose shares are down -3.2%, underperforming the Nasdaq by -2.0%.
At $42.35, INTC is 14.34% above its average analyst target price of $37.04.
The average analyst rating for the stock is hold. INTC underperformed the S&P 500 by -2.0% so far today, but outpaced the index by 32.0% over the last year with a return of 47.0%.
Intel does not release its trailing 12 month P/E ratio since its earnings per share of $-0.39 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for INTC of -108.6. Based on the company's positive earnings guidance of $1.89, the stock has a forward P/E ratio of 22.4. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 35.0, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
INTC’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Intel, we obtain a PEG ratio of 8.36, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on INTC's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 52,864,000 | 32,700,000 | 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: -7.8%
- Coefficient of variability (higher numbers indicating more instability): 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 | 14,550,000 | 24,753,000 | -10,203,000 | -8.42 |
| 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: $7.32 Billion
- Average free cash flow growth rate: -18.4%
- Coefficient of variability (the lower the better): 263.8%
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 2.2% 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 7.92. In contrast, the average P/B ratio of the S&P 500 is 2.95. Intel's P/B ratio is 1.75, telling us that the market value of the company exceeds its book value by a factor of 1, but is still below the average P/B ratio of the Technology sector.
As of first quarter of 2023, Intel is likely overvalued because it has a negative P/E ratio, a lower P/B ratio than its sector average, and a deteriorating pattern of cash flows with a downwards trend. 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.
