Any Technology Investor Should Consider This Leader
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In this article, I will explain why I like Intel (NASDAQ: INTC) and explain its main growth drivers and the reasons why I think Intel is a solid investment.
I like the fact that Intel keeps innovating. For example, Intel launched the Sandy Bridge CPU micro architecture in January 2011 and Ivy Bridge (its 22 nm shrink) in April this year. Intel will generate increased sales for this new product as Ivy Bridge has the lowest power consumption from all micros, which is one of the major reasons for its continued adoption. Sandy Bridge was preceded by the Nehalem CPU micro architecture, which was launched in the fourth quarter of 2008 as a significant improvement over the Core 2 microprocessor.
Windows 8 could be a catalyst for Intel
I think that Windows 8 launch will be beneficial to Intel. Intel currently expects that Microsoft (NASDAQ: MSFT) Windows 8 will have a positive impact on its revenue, as Intel’s support system, especially for enterprise customers is likely to be better than any competitors building processors on ARM designs. Microsoft is highly optimistic in the new Windows success. Windows 8 is a radically new version of Windows. Microsoft is turning its back on the WIMP (Windows, Icons, Menus, Pointer) computer interface in favor of a new touch-centric, single-focus model which has more in common with the iPad or Windows Phone than with traditional Windows. Microsoft announced that Intel’s new processor families, its consistent quality, and its ability to fulfill orders are expected to tilt the scales in its favor. Intel and Microsoft have been working closely together on testing and validation to ensure delivery of a high-quality experience across the nearly 200 Intel-based designs that will start launching in October. Intel CEO Paul Otellini is on record as saying "Windows 8 is one of the best things that ever happened to Intel," citing the importance of the touch interface coming to mainstream computing and the huge wave of exciting new ultrabook, tablet, and convertible device innovations coming to the market. I expect enterprise upgrades to continue over the next few quarters, fueled by replacements, new purchases and emerging markets. Before Windows 7, enterprises had been curtailing technological spending, as new platforms (including Microsoft’s OS) did not have sufficient improvements to encourage them to upgrade. However, Windows 7 and new processor architectures enabling significant performance and cost enhancements altered this trend. Of course, adoption has been slow, as first the recession in 2009 and then the European crisis in 2010 and through most of 2011 added an element of caution to enterprise spending. In the U.S. too, GDP growth has been very slow. This was the main reason that many feared that enterprises would stop upgrading. The fact that this did not happen points me that the PC market is still there and will generate profits for Intel in the foreseeable future. Intel delivered significant growth since 2009, showing skeptics that its business is not slowing down despite opinions that PC market is affecting Intel´s core business.
Cash Flow Generator
As the leader supplier of microprocessors for the worldwide personal computer (PC) market, Intel has always generated healthy profit margins and strong operating cash flow, which it invested in next generation manufacturing technology. The company has a core focus on continuous innovation. Over the last five fiscal years, Intel s revenues have grown at a CAGR of 7.1%, while its gross profit increased at a CAGR of 11.1% and operating profit increased at a CAGR of 13.2%. This shows that the business is growing nicely. The gross margin expanded 1,064 bps and the operating margin 824 bps during the same time period. Intel keeps its R&D focus, which has enabled it to enjoy pricing power and also retain its leadership position. In addition, the company success in the data center and growing software business are improving the mix of business, which in turn is helping to drive up gross margins. I bet that Intel will keep launching successful and needed products.
Intel has the capacity to spend and allocate funding on innovations and product development. Last year Intel generated a record cash generation and increased dividends payments for shareholders.
I would say Intel’s biggest success is the strong performance of its server processor segment and data storage venture. The growth margin of more than 15% yearly came from high-volume demand for storage and improved information technology infrastructure. Intel tirelessly invests in advanced technologies such as the first 3-D Tri-Gate transistor, providing better performance at lower energy consumption. It translated sustainable advantages on competitiveness against their future competitors. Another is the segments are the key driver of the company to innovate cloud infrastructure, motivating the need for the company's server chips.
Having said this, I expect that the softness in PC market appears a temporary situation. I also believe that the PC business is not dead given that the global PC demand has continued to grow in emerging markets. The average selling prices for microprocessors have risen by more than 9% in 2011. This is the highest level since 2007.
Mobile: partnership with Google is key
I think that the company is well positioned for the coming mobile internet trend. Intel has entered into an agreement with Google (NASDAQ: GOOG) for the launch of Intel-powered Android devices. At the Intel Developer Forum, it showcased a tablet reference design and smartphone prototype based on the
Medfield chip and running on the Gingerbread and Honeycomb versions of the Android OS. Both Intel and Google stated that future Android devices would support x-86 architecture and be optimized for
Intel chips. I am encouraged to see the partnership between these tech giants. Intel's previous efforts in mobile have not been too encouraging, but the agreement with Google is a big positive because Android is already a popular smartphone OS and has started making headway in the tablet market as well. Intel's mobile efforts have been plagued by problems, and it needed Google's partnership to convince handset makers that its chips will work well with Google's Android, now the world's most popular smartphone operating software. While Android is technically "open source," which means its code is freely available, Google exerts tight control over how versions are rolled out and which companies get early access, a policy that has prompted some complaints from different companies. This partnership reflects that Intel´s management is highly committed to success in the mobile arena.
Valuation reflects an opportunity
Intel is trading significantly lower than its historical valuation. At the current price of $23.3, the total market capitalization is $116.62 billion; the enterprise value is $110.2 billion. It is currently trading at 9.8x P/E, 2.4x book value and 5.9x P/CF whereas its average historical valuation is 17.1x P/E, 2.7x P/B and 8x its operating cash flow. Intel has shown that it is a fast grower for the last 10 years. During that period, the annualized growth of Intel for revenue, net income, and free cash flow is 7.27%, 15.3%, and 8.7% respectively. Furthermore, Intel has been an increasing dividend payer. In 2002, it paid $0.08 per share in dividend. In addition, in 2011, each share of Intel was entitled to $0.84 dividend payment. It experienced 26.5% annualized dividend growth from 2002 to 2011. Now, the dividend yield is 3.86%.
Even though Intel just issued revenue warning for Q3 2012 because of the softness in the enterprise PC market segment and slowing emerging market demand, I think that has already been factored in the current stock price. If EPS 2012 was only around $2.25, the average figure that many analysts expected, Intel would be still trading at only 10.36x P/E. That valuation is still quite low compared to semiconductor valuation average of 15 xs.
With the current valuation and its historical growth operating performance, Intel can be considered a good income stock in a diversified portfolio of a tech oriented value investor.
federicoflom has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.