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Intel was once the most valuable chip maker in the US
David Paul Morris/Bloomberg
While seriously injured,
Intel
he is not dead yet. And at least one analyst thinks there could be a lot more value in the beleaguered chip company’s stock than Wall Street generally believes.
Let’s be clear: the situation is grim. Intel (ticker: INTC) last week posted one of its worst quarterly reports ever, along with extremely disappointing guidance. Intel is suffering from slower PC sales (which many expected), lower demand from data center customers (which was a nasty surprise) and continued loss of market share to the rival
sophisticated micro devices
(AMD).
“This quarter’s results were below the standards we have set for the company and our shareholders,” said Intel CEO Pat Gelsinger. “We must and we will do better. The sudden and rapid decline in economic activity was the biggest driver, but the deficit also reflects our own execution issues.”
Intel posted June quarter revenue of $15.3 billion, with adjusted earnings of 29 cents per share. The Street consensus had asked for $17.9 billion and 69 cents. For the September quarter, the company forecast sales of $15 billion to $16 billion, well short of the $18.7 billion consensus. Bernstein chip analyst Stacey Rasgon called Intel’s report “the worst” she’s ever seen.
Meanwhile, the company has committed to spending about $100 billion to develop new chip manufacturing capacity in Arizona, Ohio and Europe, in a move to compete more directly with
Semiconductor Taiwan
(TSM) as a contract chip manufacturer. It’s a gamble that will take years to pay off and carries no small risk.
Once the most valuable US chip company by far, Intel’s $151 billion market cap is now surpassed by AMD’s $155 billion.
Texas Instruments
(TXN) at $162 billion,
Broadcom
(AVGO) at $216 billion, and
Nvidia
(NVDA) at $457 billion.
Taking the opposite view, Northland Securities analyst Gus Richard asserted in a research note Monday that Intel shares are now trading well below their breakup valuation. He maintains an Outperform rating on Intel shares, with a price target of $55, indicating a potential return of more than 50% from recent levels.
Intel closed up 1.8% on Monday at $36.86.
Richard takes a sum-of-the-parts approach to Intel, starting with the view that the company’s manufacturing assets have “significant strategic value” to the US, given the country’s heavy reliance on Taiwan-based chipmakers and that those chips fabs “will persist one way or another.” If Intel continues to stumble, he argues, Intel could be worth as much as $235 billion in a breakup scenario. (Equivalent to a target price of $55.)
In a strange twist, the looming threat to Taiwan’s dominance from mainland China could be the biggest reason to stay long Intel stock.
He claims that the risk that China could block or invade Taiwan sometime in the next five years “makes Intel a strategic asset” for the US Department of Defense. It estimates that Intel’s real estate, facilities and equipment—the chipmakers and existing chip-making tools—are worth $71 billion, which is their book value on Intel’s balance sheet.
He continues to theorize that Intel’s factories could be spun off as a separate company.
“Given the strategic value, we would expect the US and other countries to help finance Intel’s manufacturing, and Intel products could fill the gaps with the separation,” he writes. “Intel’s manufacturing assets could also be merged with Global Foundries (GFS),” a contract chip maker that was actually once foreclosed by AMD. It estimates the combined company will have annual revenue of $26 billion, or about half the size of market leader Taiwan Semiconductor (TSM).
Richard also estimates that Intel’s product portfolio — which includes chips for computers, data centers, networking and graphics — is worth at least 2x its expected 2022 revenue of $61 billion, which translates to $122 billion.
That leaves out two things: the company’s Mobileye self-driving unit, and Altera, which makes a class of chips known as FPGAs, or field-programmable gate arrays. Mobileye is planning an IPO as soon as this year, and Intel has said it plans to target a $50 billion valuation. Richard takes a conservative approach and estimates Mobileye’s market value at $30 billion.
For Altera, it applies a similar valuation to that of its main rival Xilinx, which was recently acquired by AMD, and adds another $12 billion.
Richard concludes: “With risk-free valuations, strong valuation support and a 4% dividend, we see little risk and plenty of upside, even if Intel doesn’t perform.”
Write to Eric J. Savitz at eric.savitz@barrons.com
