Stock of the week - Intel (21.03.2024)

Intel (INTC.US) was awarded massive financing under US Chips and Science Act. Company will receive almost $20 billion in grants and loans to expand semiconductor manufacturing capacity in the United States. This could help brighten the outlook for the company, which was lagging US peers recently. Let's take a quick look at recent news on the company as well as its valuation!

Intel receives almost $20 billion from US CHIPS act

Intel shares (INTC.US) gained earlier this week after it was reported that the company will receive large funds from US government to expand semiconductor manufacturing capacity. US Department of Commerce proposed to provide Intel with up to $8.5 billion in direct financing from the so-called CHIPS Act to advance company's semiconductor projects in Arizona, Ohio, Oregon and New Mexico. Apart from that, it was also proposed to grant Intel up to $11 billion in federal loans. Last but not least, Intel also said that it plans to claim US Treasury Department's investment tax credit, which it expects to cover up to 25% of qualified investments of over $100 billion over the next five years.

Grants, loans and tax credits will provide Intel with a massive financing and the company is likely to see much higher investments in the coming years. There is no perfect correlation between Intel's sales growth and its capital expenditures (CapEx) growth, but sales growth tended to be positive and accelerating at times of accelerating CapEx growth.

Source: Bloomberg Finance LP, XTB Research

Company lags broader semiconductor sector

Intel was one of the first US companies to sign preliminary funding agreements under CHIPS and Science Act, aimed at boosting domestic semiconductor manufacturing capacity in the United States. CHIPS act will provide close to $200 billion in funding over the next decade, with $50 billion being allocated for direct funding to boost semiconductor manufacturing. This is a big chance for Intel, but it is also a chance for its peers.

2023 was a very good year for semiconductor stocks, thanks to AI craze on the markets. However, was it also a good year for Intel? The first chart below shows performance of US semiconductor stocks as well as tech and broad market indices since the beginning of 2023 until now. As one can see, Intel has been a rather weak performer, lagging significantly behind companies like AMD or Broadcom. Intel also lags behind Nvidia, but this company was omitted from the chart as its gargantuan growth made the chart unreadable. The second chart below shows performance of the same assets, but with beginning of 2024 as a starting point. Intel has performed even worse in this comparison, being the only asset to trade lower year-to-date.

Intel has been lagging other large US semiconductor companies, like AMD or Broadcom, as well as the VanEck Semiconductor ETF since the beginning of the previous year. Source: Bloomberg Finance LP, XTB Research

Beginning of 2024 did not change the fortunes of Intel. Company continues to be a laggard and is the only major US semiconductor company to trade year-to-date lower. 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). We have run a simplified DCF valuation, using 5-year medians as assumptions in the model. For terminal value we have assumed a terminal WACC of 7% and a 3% terminal revenue growth rate. Analysis horizon was set for 10 years after which a terminal value was calculated. DCF method with such assumptions leads us to Intel valuation of $48.75 - or around 15% above yesterday's closing price. Terminal value accounts for around 70% 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.

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 6 different multiples - P/E, P/S, P/BV, P/FCF, EV/Sales and EV/EBITDA.

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. Nvidia and AMD have inflated multiples following last year's rally, and it significantly impacts mean calculations. Having said that, we have decided to use medians for valuation purposes.

Median valuations range from as low as $3.86 per share in case of P/E to $185.71 per share in case of P/BV. Valuation using P/FCF multiple cannot be calculated due to Intel's negative free cash flow in the most recent 4 quarters. Taking a trimmed mean of those valuations (excluding the highest and the lowest ones) provides us with a valuation of $89.12 per share - or over 100% above yesterday's close.

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. Quarterly payout was slashed from $0.365 per share to $0.125 per share. That's a 65% reduction! However, looking past this cut and using 5-year median dividend growth as dividend growth assumption and 5-year average cost of equity as required rate of return assumption provides us with a valuation of $25.90 per share or almost 40% 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 tested the support zone ranging above 38.2% retracement of the upward move launched in October 2022 earlier this week, but failed to break below. A point to note is that this zone marked the lower limit of the ongoing trading range. A positive demand-side reaction to this hurdle as well as subsequent bounce suggest that the move towards the upper limit of the range marked with 23.6% retracement in the $45 area may now follow. 

Source: xStation5