Intel: Size Matters – Intel Corporation (NASDAQ:INTC)

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Intel (INTC) is expected to perform quite well in 2019, and the market estimates it will be performing better than average in the following years.

Investing in the company presents a secure risk-reward proposition with quite a low downside and quite favorable upside potential. As for its price, it is reasonably priced with small dividends.

While its market dominance might be over, the company will shine again, and soon might be the time to get in.

Intel and the end of Moore’s Law

Intel has lost its position as the market leader and admits it could take up to 2021 to catch up with AMD (AMD), but someday it will catch up. Fortunately for Intel, the market cycle is long, and it should limit the market share that Intel can lose.

Authors, like Kwan-Chen Ma, point out that even Lisa Su (AMD’s CEO) admits that it will take generations to take the data servers market share away from Intel.

Moore’s Law will be over soon, and the market will shift from racing to shrink transistor size to shrink the price of the final products. Here intel has an edge. By having its factories, Intel will be able to maintain a high gross margin even if it drops its price.

As the valuation below will show, at a very reasonable price and with a reliable business, investing in Intel might provide an excellent opportunity to get a blue-chip company at a reasonable price.

Valuation

For the past years, revenue growth has oscillated from -0.9% and 12.9%, and the trend has been growing. The prediction estimates average revenue growth of 1.3% compared to the past average of 6.2%. The gross margin has had a maximum and minimum of 60.5%, and 63.3% and the trend has been negative. The forecast modeled an average gross margin of 60.5% compared to the past average of 62%. R&D as a percentage of revenue has oscillated from 19.2% and 21.6%, and the trend has been decreasing. The prediction estimates an average R&D as a percentage of revenue of 20% compared to the past average of 20.8%. The G&A as a percentage of revenue has ranged between 9.6% and 14.6%, and the trend has been negative. The forecast modeled an average G&A as a percentage of revenue of 12.7% compared to the past average of 12.9%; with the above considerations, we have the following chart.

Source: Author’s Charts

These approximations are in line with the market expectations for Intel in the next couple of years, as the image below shows.

Source: Seeking Alpha

I like to use Peter Lynch’s ratio when valuing a stock. This method uses the ratio between the expected earnings growth plus dividends and the P/E of the stock to determine its fair value. A stock that has a 1:1 ratio is reasonably priced. The higher the number, the more underpriced the stock is.

Source: Author’s Charts

This valuation takes into account the assets and liabilities of the company and the expected change in equity the company will have in the future. The growth considered in the valuation is the average yearly growth of the next few years. While the valuation considers the dividend to estimate the fair price, it is not taken into account for the average yearly return.

With this valuation, arguably, the stock is at worst overvalued by 28% and, at best, undervalued by 34%. So the stock is fairly valued.

Source: Author’s Charts

Building an adjusted Beta Pert risk profile for the current fair price of the stock, we can calculate the risk profile for purchasing the stock now.

The risk profile shows there is a 54.84% probability that Intel will trade at a lower price than it is today. Considering the potential downside, upside and the likelihood of each, the statistical value of the opportunity of investing now is -0.9%.

Constructing an adjusted Beta Pert risk profile for the long-term prospects of the stock, we can calculate the risk profile for the company.

Source: Author’s Charts

The risk profile shows there is an 8.57% probability that Intel will ever trade at a lower price than it is today. Considering the potential downside, upside, and the likelihood of each, the statistical value of the opportunity of investing now is 7.2%.

When we add to the estimate the dividends that Intel will give the next few years, the proposition becomes more attractive.

The average annual expected return for Intel is 10.8%. A performance of this magnitude is significant, especially considering the small downside potential that the stock gives.

Conclusions

Given the satisfying growth in revenue that the company has shown in the past, the quite solid financials, and the low level of debt that the company has, it might be a good time to get a good and safe position at a reasonable price. It might not be a record-breaking performer, but it has solid chances of overperforming the market for the foreseeable future.

Intel’s recent issues might be clouding its future, and while a winner takes it all story might be more epic, the most likely scenario is that both AMD and Intel will have a sizable portion of the market in the future. The current price of Intel already reflects part of AMD’s expected market share gain, which puts its value close to the fair price. At this time, betting on both horses might be the wisest strategy.

The processor’s market is considered a zero-sum game, but investing in the stock market does not necessarily play out that way. While it is logical that if Intel loses CPU market share, other companies will grab it, both companies might grow in price. Intel’s price is quite compelling, and it might be a good time for new investors to get in or for investors of other companies to hedge their bets.

If there is anything in this article, you agree or disagree with or would like me to expand further on; I would sincerely appreciate you leaving a comment. I will address it as soon as possible.

Disclosure: I am/we are long AMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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