Penn Wealth Publishing

2021.01.10 Penn Wealth Report Vol 9 Issue 01

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10 Jan 2021 penn wealth Report volume 9 issue 01 15 Copyright 2021. All Rights Reserved. Science & Technology Investor investment intelligence Intel is trading like a stodgy blue chip rather than a tech giant, and that spells opportunity. Using the PE multiple alone, which chipmaker seems safest to own? To say that tech investors have all but written off Intel is a gross understatement. ey are treating it like one of their grandparents' stodgy old blue chips, which is about the greatest insult one could make to a company in the semiconductor arena. Perhaps even the comparison to blue chips is an understatement: Intel has a PE ratio of 9, while value stocks AT&T T and General Electic GE have multiples of 19 and 24, respectively. Unless Intel is about to go belly up, these numbers make no sense. Is it Intel's loss of market share to the competition? Considering over 80% of CPUs still run on Intel chips and over 90% of servers use the firm's devices, that can't be it. What about revenue and profit? Over the trailing twelve months (TTM), Intel gen- erated revenues of $78B and net income of $22B. AMD, the darling of the industry in the eyes of investors, had reve- nues of $8.6B and net income of $879M TTM. NVIDIA, now with a market cap of $323B (Intel's size is now just $187B), had revenues of $15B and net income of $3.8B TTM. As financials can be mind-glazing and are backward looking, let's consider what is really important: What will the key drivers be for Intel going forward? R&D and M&A: Intel's future. A company can grow in two distinct ways: organically, through research and development (R&D), and inorganically, through mergers and acquisitions (M&A). From the standpoint of the former, Intel's firepower blows away the competition. e firm spent a whopping $13.6B in R&D last year, versus NVIDIA's $2.5B and AMD's $1.5B. e disparity in those numbers is stag- gering, and it certainly doesn't point to a company resting on its laurels. Before getting into where those R&D dollars are going, there is an interesting aspect to Apple's divorce with Intel. Apple has always been a super-demanding customer; no doubt an attribute it mastered under Steve Jobs. While Tim Cook is not the draco- nian taskmaster that Jobs was, we must wonder if Intel, in some weird way, is relieved to no longer have to meet the demands of Apple and can now focus more on where it wants to go. While investors view Intel as PC-centric, an area they errone- ously view as diminishing (the PC market will merely morph), they seemingly fail to acknowledge the company's dominant role in cloud computing—one of the fastest growing areas in tech. As an almost unfathomable amount of data leaves "hard" local devices for the cloud, consider this: Intel makes between 90% and 95% of the data center and cloud platform servers. And their research in this area should keep AMD a distant second. en there is the ultra-lucrative promise of autonomous vehicles. ese futuristic machines will require massive "brains" to operate safely in a world of humans, and those brains will be made up of chips. In 2017, Intel made a gutsy bet in this arena when it bought Mobileye, an Israeli-based company focused on provid- ing the chips for autonomous vehicles. With over 450 engi- neers at the firm, this new Intel division has already partnered with 25 different automakers and suppliers, such as BMW and Delphi (now Aptiv PLC APTV ). Intel believes there must be a consistent, common platform for the safe deployment of self-driving vehicles, and it aims to be the key player. ree burgeoning frontiers of technology are knocking on the door: 5G, IoT (Internet of ings), and AI (artificial intelli- gence). In 2016, Intel acquired deep learning startup Nervana, a developer of AI software and hardware, and Movidius, a startup that makes the computer vision processors for drones and vir- tual reality devices. en there was Intel's $16.7 billion purchase of Altera, its largest acquisition to date. Altera manufactures field programmable gate array (FPGA) chips, which can be pro- grammed after they leave the factory. ese chips will be a key ingredient to the billions of connected devices that will make up the Internet of ings. ese proactive, future-oriented moves belie the argument that Intel is stuck in the past. In fact, it is a lot easier to make the case that AMD has put itself in a precarious situation with its own expensive acquisitions. Empirical evidence of that can be found in the beta (risk level) of the two companies: AMD has a beta of 2.332, while Intel sits at 0.7233. Our money is on Intel. Investors are Grossly Misjudging Intel's Power and Growth Potential Counterpoint

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