Investment Thesis
The perennial underperformer Intel Corporation (NASDAQ:INTC) has outperformed the iShares Semiconductor ETF (SOXX) and its leading semi peers YTD. However, it shouldn't be surprising given INTC's relative valuation against the industry and its peers. While relative volatility isone of the critical considerations for dividend investors, we believe it shouldn't deter growth investors.
Therefore, whether you should buy INTC stock ahead of its Q1 earnings will depend on whether you are investing for growth or dividends.
The former seems unappealing, while the latter, with INTC stock's NTM dividend yield of 3.2%, is worth considering. Furthermore, it's higher than the semi industry average of 1.5%. In addition, CEO Pat Gelsinger has reaffirmed his commitment to maintaining its dividend through its investments phase.
But, we will not be giving this article a dividend spin, as we think it's critical for investors to consider its growth story, given its heavy investments. We discuss why INTC stock remains a Hold.
What To Expect From Intel’s Q1 Earnings
Intel consensus estimates (S&P Capital IQ)
Intel is slated to deliver itsQ1 earnings card on April 28, as Gelsinger & Team will update investors on the YTD progress of its strategic revamp. Gelsinger appeared to be pretty confident of Intel's progress at a recent March conference. He articulated (edited):
There's an insatiable demand for us to enter the market to provide a good, credible alternative. We discussed six conservative business plans, right, which de-risks the overall Intel business plan, and we gave the financial metrics against it. So I'm very confident in that growth profile. And you're going to see that every quarter. We'll give you the updates on the six. And in Q1, as we do our next earnings call, you'll see the first clarity around each one of them. I think we're in great shape to deliver those growth profiles that we laid out collectively. I'm a meet, beat, raise kind of guy, and that's exactly what I expect these businesses to perform. They're going to be accountable and transparent to you all. (Morgan Stanley TMT Conference 2022)
The consensus estimates suggest Intel could post revenue of $18.33B (down 1.3% YoY), in line withIntel's guidance of $18.3B. Intel is also estimated to report an adjusted EBIT margin of 21.5%, down from Q4's 25.9%. Therefore, the Street considers Intel's guidance prudent and could have reflected the recent headwinds in the consumer PC segment. BofA (BAC) also weighed in, suggesting Intel's guidance was conservative. It added (edited):
Any concerns about the weak PC market could already be baked-in to their stocks. The weakness in the PC is now well known, but any more concerns from Europe due to the war, as well as Covid-related concerns from China, could push down PC demand further in the second quarter. Intel is more exposed than AMD (AMD) to a slowing PC market, but the Pat Gelsinger-led company guided conservatively when it last reported.
Intel Stock Key Valuation Metrics
INTC stock YTD performance Vs. peers (Koyfin)
INTC stock NTM FCF yield % and NTM normalized P/E (TIKR)
Semi investors have had a lot of volatility to deal with recently. As seen in the first chart above, the leading players have suffered over the past four months. However, INTC stock outperformed the SOXX (YTD: -24.2%) and its peers, with a YTD return of -8.9%. Coupled with its dividend yield of 3.2%, Intel investors have had some "swagger" over its leading peers across the semi value chain. For instance, arch-rival AMD stock is down 38.8% YTD, posting the worst performance of the group. NVIDIA (NVDA) stock is down 33.6% as investors parsed its growth premium in a potentially slower H1'22 consumer end market. Even the fab equipment suppliers were not spared. Applied Materials (AMAT) and ASML (ASML) stocks are down 28.2% and 23.7%, respectively. In addition, foundry leader TSMC (TSM) is down 20.2%.
Consequently, we can surmise that the semi industry has generally gone into a bear market. The market digested its growth premium and priced in the recent weakness. Of course, except for Intel, due to its relatively lower valuation than the industry.
As seen above, INTC stock last traded at an NTM normalized P/E of 13.4x (5Y mean: 12.5x). It's also markedly lower than semi industry median P/E of 20.7x. Furthermore, the stock is still expected to be FCF profitable, despite its massive CapEx investments. As a result, INTC stock last traded at an NTM FCF yield of 1.02%, but much lower than its 5Y mean of 5.7%.
However, we think investors remain confident that Intel's FCF metrics could improve over time as it winds down the intensity of CapEx intensity. Gelsinger also alluded that its current investments cadence is necessary to compensate for previous years of underinvestment.
Is INTC Stock A Buy, Sell, Or Hold?
INTC stock consensus price targets Vs. stock performance (TIKR)
If you bought INTC stock for dividends, we think you can continue to hold it. Gelsinger was clear that he wouldn't force these investors "off the bus." Instead, he recognized the importance of keeping them on board as the company invests for growth over the next few years.
But, if you are considering buying INTC for growth because it's cheap, you need to have a high conviction over its execution. Given its FCF metrics, Intel is investing very aggressively, which has significantly hampered its FCF profitability. Therefore, if these investments do not pan out accordingly over time, the market's confidence in Intel's execution could deteriorate further.
In addition, the Street has also been relatively tepid over Intel's aggressive roadmap. As a result, INTC stock's average consensus price targets (PTs) have been consistently revised downwards over the past year. Moreover, it last traded well above its most conservative PTs of $40. In addition, INTC stock normalized NTM P/E is at best in line with its 5Y mean. Therefore, scooping up INTC at the current levels is at most a fair valuation but not incredibly cheap.
Source: Seeking Alpha
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