Buy Intel Already It Is Undervalued
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Intel (NASDAQ: INTC) is an undervalued technology beast. There is no other way to put it. The company designs top notch chips that power servers, laptops, desktop computers, and mobile devices. The following table sums up Intel’s performance in the last twelve months.
| Intel | Q2 2012 | Q1 2012 | Q4 2011 | Q3 2011 | Total |
| Revenue (billions $) | 13.5 | 12.9 | 13.9 | 14.3 | 54.6 |
| EPS ($) | 0.54 | 0.53 | 0.64 | 0.69 | 2.4 |
As shown, Intel has a trailing twelve months EPS of $2.40. At the current stock price of $23.18, Intel has a PE ratio of 9.66. A PE of 9.66 is a ridiculously low price for a company that will no doubt continue to dominate the semiconductor industry and likely exist as long as modern human civilization. Additionally, Intel has a tangible book value per diluted share of $6.42. Tangible book value is the same as book value, but it strips away intangible assets like goodwill and brand name. While intangible assets have value, they are difficult to price because they are not physical assets.
A simple analysis that can be used to evaluate Intel is to calculate a rate of return (rate of return = EPS / (Stock Price - Tangible Book Value Per Share)). Rate of return is just a simple manipulation of the present value equation for a perpetuity. Anyway, applying the rate of return equation, Intel has a return of about 14%. Since the US 30 year bond has a yield of about 3%, it is clear that Intel has an above average return. A supporting analysis that can be used is simple payback, which is the number of years it would take to earn the original investment cost. Simple payback is just the inverse of the rate of return equation. Taking the inverse of 14%, one gets a simple payback of about seven years. Since a PE (almost equal to simple payback) of 15 is usually considered normal, seven years is really good.
Investors, who are dubious of Intel as an investment, are probably concerned about Intel’s lower guidance and the impact of mobile devices. In Q2 2012, Intel CEO Paul Otellini warned, “As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment.” Additionally, on September 7, Intel further lowered its guidance to $13.2 billion, plus or minus $300 million. Comparing the revenue guidance to Q3 2011, the guidance is lower so the EPS will likely be lower as well.
However, according to Intel the lower guidance is the result of a challenging macroeconomic environment. Looking at the continuing debt crisis in Europe and the economic problems here in the US, it is easy to see why Intel is facing a slowdown. However, Intel and the computing world will still be around when the global economy recovers. If the economy never recovers, then a bad investment in Intel will probably be the least of investors’ worries.
The effect of mobile devices on Intel is a completely different story. Mobile device sales are booming while PC shipments are stagnant. In Q2, smartphone and tablet shipments grew by 42.2% and 66.2% year over year, respectively. Meanwhile, PC shipments declined by 0.1% year over year. The traditional PC giants, Microsoft (NASDAQ: MSFT) and Intel, are almost insignificant in the mobile device market. In smartphones, Windows has a 3.5% market share. The smartphone market is dominated by Google (NASDAQ: GOOG) Android and Apple (NASDAQ: AAPL) iOS. Android and iOS have market shares of 68.1% and 16.9%, respectively. The tablet market is not much different, except it is dominated by Apple (IDC).
Intel’s archenemy, in all of this, is ARM Holdings (NASDAQ: ARMH). ARM currently owns 95% of the smartphone market and Apple used the ARM architecture for its newest iPad. Basically, ARM has an army of licensees. However, Intel has a fast approaching ally, Windows 8. Microsoft has integrated a full touch screen GUI into Windows 8, making it a suitable OS for tablets. This is huge for Intel.
On its release, Windows 8 will come in two versions: Windows 8 for x86 and Windows RT for ARM. However, Windows RT will only be sold to OEMs, has no Windows legacy support, and is really only meant for tablets. On the other hand, Windows 8 will support Windows legacy programs so Intel will have the advantage. Also, Windows 8 might launch the era of touch screen PCs, which would spur PC upgrades and boost Intel’s profits.
Moreover, Intel is not that far back in thermal design power (TDP) from ARM. The Lava XOLO X900 is powered by Intel’s Medfield Atom. The device holds its own against cutting edge smartphones and is in the middle of the pack in normalized battery life. Lastly, Intel has a huge advantage in process technology. Intel already has FinFET capability, while its competition is still on planar transistors.
In summary, Intel makes a great long term investment. At its current price, Intel is a steal. The company has a duopoly with AMD in the PC CPU market, a dividend yield of almost 4%, ROA of 18%, net profit margin of 23%, and a PE of less than ten. Additionally, the upcoming release of Windows 8 should boost Intel's sales and allow Wintel to challenge Android and Apple in the tablet space. Finally, Intel has a huge advantage in process technology. Intel is a steal.
Interested in Additional Analysis?
When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors have understand with the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.
Alvin owns shares of Microsoft. The Motley Fool owns shares of Apple, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and 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.
