Intel: The Best Chip Investment
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As of late, Intel (NASDAQ: INTC) has received a lot of positive publicity in the blogosphere, myself included. It seems a lot of writers are drumming up the rich valuation and recently increased dividend as a great reason to buy the stock now. While valuation is an important metric to be aware of, I repeatedly invest in companies that are also well positioned for accelerated future growth. In this commentary, you will find my reasoning for why Intel meets my criteria for ownership.
Based on my estimations and using Friday’s closing price of $26.07, I value Intel to be worth $33.25. This methodology uses a conservative 5.2% estimated earnings growth rate, a trailing twelve month PE ratio of 11.03, and strips out intangible book value from their balance sheet. If I get aggressive and estimate Intel could grow earnings at 10%, it would add an additional $7 to its value. On an annualized basis over the last five years, Intel has grown its dividend 14.4% and increased cash flow by 13.8%. Intel’s Current Assets more than cover its Current Liabilities and Long Term Debt, meaning they are not overextended in terms of financial risk taking. Based on this bottom up analysis, Intel’s stock is cheap, and no warning signs have surfaced.
Intel’s chip architecture, x86, by nature is power hungry, making their designs less palatable for mobile applications and sleeker form factors. Shrinking transistors has been Intel’s primary approach to dealing with this disadvantage against power-efficient rival, ARM Holdings (NASDAQ: ARMH). Intel’s foundry has finally caught up to its lofty ambitions by launching Medfield and Ivy Bridge, and both show how serious Intel is taking their future. While true that Medfield is not cutting edge when compared against ARM’s next generation designs, it’s a huge accomplishment for Intel. For the first time ever, Intel has an x86 chip inside a smartphone, and that’s a big deal for their future smartphone endeavors.
Talking Ivy Bridge, their 22nm process is best in class and one generation ahead of the competition. Taiwan Semiconductors (NYSE: TSM) and Global Foundries are still ramping up production for their 28-32nm processes; in the world of chips, this is an extraordinary gap. Granted, Intel is notoriously one of the largest R&D spenders in the space, with full year 2011 spending totaling $7.3 billion. To put that number in perspective, that’s more than Advanced Micro Devices (NYSE: AMD) and Nvidia’s (NASDAQ: NVDA) annual revenues. Looking at 2012 numbers, Intel has already invested a mind blowing $18.3 billion in R&D, which is more than Qualcomm’s (NASDAQ: QCOM) revenues last year.
Below is Intel’s roadmap, showing how aggressively they intend to further widen their lead:
By leveraging their leading position in semiconductor manufacturing, Intel is poised to become more and more competitive on the power efficiency front. On a purely technological basis, 2013 and 2014 are Intel’s years for the taking.
Best in Class Fabrication
It should come as no surprise that Intel is regarded as the best chip manufacturer in the world. That’s because Intel isn’t like most other chip manufacturers. They are one of the only remaining Integrated Device Manufacturers (IDM) on the planet. In other words, they are a vertically integrated chip manufacturer, whereas the competition typically outsources manufacturing to third parties. This major difference allows Intel to avoid any conflicts of interest (and added friction) that arise between designers and manufacturers. Expanding further, Intel treats design and implementation as one element, which reduces internal conflicts between company divisions, and encourages team-based problem solving.
“Copy Exactly!” Ever heard of it? This is Intel’s systematic approach for duplicating designs across their worldwide manufacturing facilities. “Copy Exactly!” aims to control every variable that can be controlled during a production run, from the obvious ones like machinery, to less obvious ones like lighting color temperature. Think of it like the franchise approach to manufacturing, where every foundry is nearly as identical as can be for a synchronized process and expected output. With “Copy Exactly!” Intel intends to prevent factory level issues so they can better focus their efforts on standardizing manufacturing. By being a synchronized IDM, Intel has managed to break away from the competition and offer a more technologically advanced product.
Valuation metrics alone will not take a stock price higher; a positive catalyst is necessary for the market to realize intrinsic value. Examining Intel’s leading position, best in class technologies, and superior manufacturing processes, all lend promise for patient shareholders. I own Intel first because I believe in their long term business strategy and second because they offer a great value.
Between all of these reasons, why would you not want to own Intel?
TopDownTrends owns shares of Intel. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel and NVIDIA. 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.