We know the risks. Owning shares in Intel requires comfort with a number of medium and longer term risks such as some share loss in core x86 business, still-delayed process technology innovation that is critical to sustaining barriers to entry, a new architecture (ARM) potentially encroaching its territory in the 2018-2020 period, exposure to cyclical memory profits, a history of poor acquisitions, a balance sheet that is less helpful than in previous years…and of course, the semi cycle.
Notwithstanding that gaggle of risks and concerns – the near term looks pretty darn good. Specifically:
- Easy comps for DCG (server) in 4Q/1Q
- Large demand trend for data analytics driving near term server business
- Return of scientific/academic/government demand helping drive Top500 area of demand growth
- Sandbagged PC guidance for 4Q
- Altera finally producing revenue results in the same strato-zone as peer XLNX
- The RIF from last year finally rolled through into OPEX for 4Q and 2018
- The FCF contraction we had foreseen has been barely noticeable
- MBLY is behind us, is a write-down that will eventually come through, but in eight or nine years – maybe the next acquisition will be smarter?
- While NVDA instances may run alongside high end INTC instances in AI-ML, we think Intel’s marketing push that the former is re-purposed graphics while INTC’s newest offering is a purpose built offering for Machine Learning is actually starting to make a dent in the minds that matter, and the company will re-gain some mindshare in this important category
Intel is trading at a 5-6% FCF yield (~20x EV/FCF) while peer TXN is a 4-5% yield (~23x). Normally, I would accept the pushback that TXN is a better business. But Intel’s monolithic market share in its core markets, its growth drivers, and its leadership in technology to sustain that growth all imply the discount may be a subjective reality and not an objective requirement.
More to come...
Happy holidays
