Shares of Intel (INTC) have seen a small bounce from their lows as the company announced an interesting bolt-on deal, inspiring some confidence among its investors. The company has been active on the buy front with the purchase of Tower Semiconductor (TSEM), a smaller, yet multi-billion deal for a firm the size of Intel. At the same time, the company is divesting non-core assets to invest tens of billions into new technology and related production capacity and capabilities, which should become the driver behind its recovery.
Back To The Summer
In July of last year, I concluded that Intel was back to the low expectations game again. I concluded that the company has seen a full bust-boom-bust cycle over the past year.
The business has seen some struggles like the economy as well over the past years as well-documented chip shortages and supply chain issues had a negative impact, yet a great deal of the operating underperformance stems from self-inflicted wounds. After all, Intel has been lagging in terms of innovative capabilities, losing real market share to the likes of AMD (AMD) which have made progress on smaller chips.
Intel dropped a bomb in the summer of 2020 as the company announced that the 7nm product transition would be delayed by at least six months, seen late in 2022 or early in 2023, creating a huge advantage for AMD. After this bust, Intel started 2021 on a solid note with the hiring of industry legend Pat Gelsinger, who furthermore talked upbeat on the progress on the 7nm front. Furthermore, 2020 results were solid with sales posted at $ 77.9 billion on which the company earned $ 5.30 per share on an adjusted basis.
These results made that shares briefly rallied to the $ 70 mark in April, despite the fact that 2021 sales were seen down to $ 72 billion and earnings were set to fall back to $ 4.55 per share on the back of the impact of the competitive position. The company hiked the guidance, calling for $ 77 billion in sales in 2021 and earnings to $ 4.80 per share, but shares fell back to the $ 53 mark in the summer. Shortage of supplies, a potential $ 30 billion deal to buy GlobalFoundries and concerns on the 7nm roadmap were factors behind this.
With net debt cut to $ 9 billion and earnings multiples coming in around 10-11 times at $ 53, I started to get compelled over the summer based on the true value position again, even though I did not expect a quick or meaningful recovery in the near term given the challenges of the business, which requires real execution to become apparent.
Since doubts arose on the rebound of Intel over the past summer, shares have been trading pretty much range-bound between $ 48 and $ 55 per share, currently trading at the lower end of the range. The company has been quite active on the operational front, making targeted investments while announcing intentions to streamline the business as well.
In September, Intel announced a $ 20 billion capacity expansion in Arizona, marking a huge and multi-year investment to further expand capacity. In October, the company posted a 5% increase in year-over-year sales, marking a dramatic improvement from the year before on the back of the chips shortages and easy comparables.
In December, Intel announced its intention to take Mobileye public, although the company would like to maintain a majority stake in the business. That would give the business a flotation, but given the setback in technology markets, the timing is a bit off. Intel acquired the business in a $ 15 billion deal in 2017, so the offering is quite a big deal.
The question is how much higher valuation Intel will fetch, as Mobileye is set to generate just around $ 1.4 billion in sales in 2021. Of course, the timing is only seen mid-2022, so Intel has some time to wait for a recovery in technology stocks, needed as the hopes on this future IPO were high with some pegging the value as high as $ 50 billion.
The company further closed a deal with SK hynix to sell its NAND and SSD business in a $ 7 billion deal, as the deal was already announced in 2020, of course.
The New Base
Towards the end of January, Intel posted its 2021 results with GAAP sales actually up just over a percent to $ 79.0 billion. The company posted adjusted earnings of $ 4.86 per share, down eight cents on the year before as earnings of $ 19.9 billion mark a huge number and still very solid margins. This kind of stabilization in 2021 is not set to get replicated in 2022 with first quarter sales seen at just $ 18.3 billion, with adjusted earnings seen around $ 0.80 per share.
With the SK hynix deal closing just before the end of the year, Intel ended the year with a very modest net debt load of around $ 3 billion, if we include equity investments alongside the cash holdings and near-term cash equivalent positions. The improved balance sheet is much needed as Intel announced another $ 20 billion investment into new production facilities, this time planned in Ohio.
These are sizable amounts as the once so dominant Intel has seen its market capitalization shrink to roughly $ 200 billion here at levels just below the $ 50 mark. In mid-February, Intel announced somewhat of a surprising acquisition, as it has reached a $ 5.4 billion deal to acquire Tower Semiconductor in a $ 53 per share deal. The deal is set to advance the Intel IDM 2.0 strategy. The deal comes at a 2-3% price tag for Intel, but comes at a price at a near 50% premium!
Nonetheless, the next acquisition in Israel has potential as Intel has a new and more focused roadmap, taking advantage of its political backing on the global race for chips, shortages and desire to become less reliant on Asian suppliers and producers.
Having initiated a very small position over the past summer, I am doubling down here, even as many other technology names have sold off. While the recent moves come a bit quick and some questions can be asked, it is the leadership by Mr. Gelsinger, his strategy and the ever more geopolitical importance of chips in this world which makes that despite some real challenges, Intel looks like a solid value play here.