Stock of the week - Intel (11.07.2024)

• US semiconductor stocks perform well this week
• Philadelphia Semiconductor Index trades over 4% higher week-to-date
• Intel leads chip stocks this week, but lags on YTD basis
• AI laptop chip could be the next driver for the company
• Intel spends more on R&D than Nvidia and AMD combined
• Q2 2024 earnings release scheduled for August 1
• A look at the valuation

US semiconductor stocks have been performing really well so far this week, with Philadelphia Semiconductor index climbing to a fresh all-time highs. Gains within the chips sector were broad, and were not driven by any particular stock. Strong gains could also be spotted on Intel, who has been sector's underperformer so far this year. Let's take a look at whether there were any news that could justify Intel's gains and how company's valuation looks like.

Semiconductor sectors outperforms but Intel still lags year-to-date

Semiconductor sector can be found among top performers this week. Philadelphia Semiconductor Index, consisting of US chip stocks, is up 4.4% week-to-date, compared to 1.20% and 1.39% gains for S&P 500 and Nasdaq-100 indices, respectively. Intel has been one of the best performing index members in this period, gaining 8.9% so far this week. However, even after those gains, Intel is lagging Philadelphia index significantly - the index gained over 41% year-to-date, while Intel trades around 30% lower year-to-date. 

Source: Bloomberg Finance LP, XTB Research

New AI chip on watch

As we have already mentioned, this week's gains of the semiconductor sector are not driven by any particular stock or piece of news. Some try to reason recent gains on Intel's stocks are driven by high hopes on company's upcoming Lunar Lake AI laptop chip. However, this explanation for the move looks rather unlikely given that this chip was unveiled a month ago and are yet to debut. Nevertheless, the chip could help reinforce Intel's position in its dominant market.

Intel has been leader in PC CPU market for a long time and held an around-76% share of the market in Q1 2024, both in desktop and server CPUs. However, this marks quite a noticeable drop froum around-80% share in Q4 2023. Meanwhile, AMD managed to boost its share from almost-20% in Q4 2023 to almost-24% in Q1 2024, which is the highest market share AMD had in CPU market in years. Intel may be able to leverage its dominant market share in CPU market to ensure successful rollout of its AI chip, that may help pave the way for emergence of market of AI laptops, which in turn could be the next driver of growth for Intel.

A point to note is that Intel is investing heavily in its new products. Chart below comparess 4-quarter rolling Research & Development (R&D) expenses by Intel, AMD and Nvidia. Intel is not only spending more than any of the other two companies, but is also spending more than those two companies combined!

Intel is spending much more on Research & Development than Nvidia and AMD combined! Source: Bloomberg Finance LP, XTB Research

Q2 earnings release on August 1, 2024

Wall Street earnings season for Q2 2024 is beginning this week, but traders will have to wait a bit for release of quarterly results from Intel. Intel is scheduled to report its Q2 2024 earnings report on August 1, 2024. Report will be closely watched given the two most recent quarterly releases from Intel triggered a significant slump in company's share price. A point to note is that those declines came even in spite of Intel reporting better-than-expected sales and profits.

Recent earnings releases from Intel were followed by share price drops as the company warned to losses in its foundry business will continue to widen and are expected to peak this year. Markets hoped that peak is already behind and company's outlook will improve more given that Intel will be a big beneficiary of the CHIPS Act.

Having said that, a key to post-earnings market reaction will lie in details. Should the company provide investors with a somewhat optimistic outlook, i.e. by saying that it expects narrower losses in its foundry business than earlier, stock could benefit. Also, a clearer outlook on the business impact of the upcoming AI chip would be welcome. 

Beats and misses, as well as post-earnings price reaction for the past 20 quarterly releases from Intel. Source: Bloomberg Finance LP, XTB Research

Valuation

Let's take a quick look at Intel's valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow method

Let's begin with a discounted cash flow method (DCF). Usually we run a simplified DCF valuation, using 5-year medians as assumptions in the model. However, given that Intel has been suffering period of unprofitability and declining sales recently, and is just begin to turn the corner, we decided to our usual approach may not be suitable in this case.

Instead, we have decided to base assumptions in our DCF model for Intel on average margins and growth rates for US semiconductor stocks. Having said that, we have assumed am 8% revenue growth rate and a 17% operating margin, while CapEx, Working Capital and Depreciation assumptions were based on 5-year averages for Intel. Detailed forecasts for 5 years were prepared. For terminal value we have assumed a terminal WACC of 7% and a 3% terminal revenue growth rate. DCF method with such assumptions leads us to Intel valuation of $44.54 - or around 27% above yesterday's closing price. Terminal value accounts for around 84% of the forecast.

However, as usual, a note of caution is needed. DCF is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different Operating Margin and Revenue Growth assumptions and one for Terminal WACC and Terminal Revenue Growth assumptions.

Also, it should be once again noted that assumption in the model have been set on sector-averages, which are not reflected in Intel's financials, at least not yet. Having said that, one can see assumptions as being aggressive.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples Comparison

Next, let's move to the multiple comparison for Intel. First, we have created a peer group of US chip companies including Nvidia, IBM, Advanced Micro Devices, Qualcomm, Broadcom, Micron Technology, Microchip Technology, Analog Devices and Texas Instruments. We have taken a look at a number of different multiples, including trailing and forward multiples.

Taking a look at the table below, we can see that there is significant volatility in multiples for Intel peers, especially when it comes to P/E and P/FCF multiples. Inflated multiples of Nvidia and AMD are distorting mean and cap-weighted multiples, and it significantly impacts valuation calculations. As a result, Intel looks to be undervalued compared to peer group by almost every measure.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

The third valuation method we will use is Gordon Growth Model, a method based on dividends. Intel has a long track record of paying and rising dividends. However, company made a massive dividend cut at the beginning of previous year, slashing quarterly payout by 65%. Using a 5-year average dividend growth rate prior to the cut (5%) as well as 5-year average cost of equity as required rate of return (8%) provides us with a valuation of $17.50 per Intel's share, or almost 50% below yesterday's closing price.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

Last but not least, let's take a look at Intel chart (INTC.US). Taking a look at the chart at D1 interval, we can see that the stock has halted January-April 2024 sell-off in the $30.00 area, where one can find a 78.6% retracement of the upward move launched in Q4 2022. Stock caught a bid this week after a period of sideways trading and managed to climb above 50-session moving average (green line) and to the highest level since late-April 2024. However, bulls have run into a resistance zone marked with the 61.8% retracement in the $35.00 area. This is an important zone as it also hosts the upper limit of the Overbalance structure. A break above could hint at trend reversal and suggest that more gains are looming. On the other hand, it should be noted that 14-day RSI indicator climbed above 70.0 mark - a level often associated with local highs (orange circle) - so traders should be aware of a risk of potential pullback.

Source: xStation5