Legacy chipmaker Intel (INTC) has shed 60% on a year-to-date basis due to the company’s lackluster performance in 2024 and the sizable losses it has been posting. While the bulls think Intel is a hidden gem with deep value, the bears believe it’s a value trap. So, what is it exactly? That’s what I am going to try to answer in this article.
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To understand Intel’s situation better, it is important to note that the company, known for its computer processors and the x86 architecture (the instruction set that dominates personal computers even today), has recently been dethroned from its kingpin status in the chips industry. It simply failed to keep up with the competition, but let’s save the historic missteps for another time.
Consequently, I am bearish on Intel because of its sizable losses, its significant cash burn, and poor execution.
Intel Faces Widening Losses
Central to my negative stance on Intel is the fact that the company’s losses are widening. Although I said I’d save the missteps for another time, understanding the reason behind these losses is important before we jump into the numbers.
Going back to the early 2000s, Intel was the go-to shop for anyone looking for advanced chips, and business was booming. The company was the first to market with the latest chips up until it got too comfortable with its status as a chip kingpin. For instance, in 2014, when Barrack Obama was in office, Intel delayed the opening of a key location called Fab 42 due to a temporary slowdown in the PC market. Little did it know, this decision would cost it losing out to an emerging foundry company that was half its size at the time.
Long story short, Intel lost its place to the Street’s favorite foundry operator Taiwan Semiconductor Manufacturing Company (TSM). Now let’s dive into the numbers.
In Q2 2024, Intel posted a loss per share of $0.38 and missed Street estimates by $0.27. Moreover, its revenue also fell by 1% year over year to $12.8 billion, again falling short of market expectations by $148 million. Intel’s foundry business is the major concern, as it posted an operating loss of $2.83 billion, more than the loss of $1.86 billion a year ago.
Adding to this, Intel’s share capital is increasing, which is just bad for a loss-making company. Its diluted shares increased to 4.26 billion from 4.19 billion a year ago. So not only are you getting more losses, but you’re also getting diluted. Now the bulls will argue that Intel Products is profitable, and it was, with $2.9 billion in operating income in Q2, up from $2.5 billion a year ago. However, that just doesn’t do it for me. It’s not enough to offset the losses that Intel Foundry has been posting.
Moreover, Intel has been playing catch-up for quite some time now and it’s still not close to its competitors. The losses that this semiconductor giant has been posting are mainly due to the hefty investments it’s making to desperately win its place back. Its CapEx exceeded $11.6 billion during Q2 2024 while it only made $1.06 billion in operating cash flow. This represents an alarmingly high burn rate, even with the partner contributions of $11.8 billion.
Intel Cuts Costs and Suspends Dividend
Moving forward, I am not a fan of the decisions Intel’s management made after posting another disappointing quarter. While the company may be trying to be smart with capital allocation, it just doesn’t have a good track record. It has repeatedly delayed facilities and laid off staff in the past whenever it faced a challenge. During the Q2 2024 earnings call, Intel said it’s going to lay off 15% of its workers by the end of 2025 to cut costs.
Furthermore, Intel said it will suspend its dividend at the beginning of Q4 2024, a move that wasn’t received well by the income investors that held the stock. The company explained that it has to invest that money into CapEx to catch up to rivals. It already has a substantial PP&E portion on the cash flow statement, and although it fell year over year, its cash generation is just not enough to justify it.
Additionally, considering how Intel’s semiconductor fabrication plants have been delayed in the past, I do not have a lot of confidence in management’s ability to be on schedule this time around.
Intel Is a Value Trap
As I mentioned before, I agree with the bears who believe Intel is a value trap right now, but let me show you how. The bulls are arguing that Intel is trading at less than its book value (0.7x TTM P/B), so if it were to liquidate its business, they would have some sort of margin of safety. Let me settle this with a short exercise.
If you turn to the balance sheet, you’ll see that Intel has about $206.2 billion in total assets, of which $27.4 billion is just goodwill and another $4.3 billion is in intangible assets. So there is about $32 billion that can’t be capitalized in a liquidation scenario.
Now, if you look at the current assets of $50.8 billion and then take away the current liabilities of $32 billion and debt of $48.3 billion, you end up with -$29.5 billion. Therefore, Intel’s negative net worth in a liquidation scenario does not give any investor a margin of safety.
Finally, let’s say you are valuing Intel based on cash flow. I see that the stock is trading at 10.2 times its projected operating cash flow, a 51% discount to its sector. Can it produce enough cash flow over the next, say, 10 years? I am not comfortable with assigning Intel multiples and growth rates and projecting so far out into the future, given the company’s execution in the past and how it’s struggling right now.
From where I stand right now, I see a business that has seen its cash flow, net income, and sales consistently decline over the past decade. Therefore, Intel, in my humble opinion, is a value trap and not in deep value territory.
Analysts’ View Intel Stock as a Hold
On the Street, INTC stock sports a consensus “Hold” rating based on 1 Buy, 26 Hold, and 6 Sell recommendations. The average INTC price target of $26.09 implies an upside of 32.8% from current levels.
The Bottom Line
In summary, Intel’s substantial year-to-date losses, increasing cash burn, and management’s questionable decisions paint a troubling picture. Despite the low valuation and potential appeal to value investors, the company’s financial instability and past missteps indicate it’s more of a value trap than a genuine bargain. The widening losses and high burn rate from significant investments highlight the risks. Additionally, the suspension of dividends and ongoing operational delays add to the concerns. Given Intel’s declining financial metrics and ineffective recovery efforts, I remain cautious and skeptical about its potential for a turnaround.
