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Friday, January 8, 2021

Intel is Looking Very Interesting for Value and Dividend Investor

Intel Corporation (Ticker: INTC) has been in the news lately, and most of the news was bad. The worst news is such as process delays or perceived threats to Intel's business model. In 2020, the stock dropped by 17%, whiled the Nasdaq 100 and S&P 500 indices rose by 15% and 45%, respectively. Shares of Advanced Micro Devices (Ticker: AMD) and Nvidia (Ticker: NVDA), Intel's biggest rivals, rose by 90% and 120%, respectively. Many Wall Street analysts have written how Intel is no longer a viable investment.

I have seen Intel's stock price dropped significantly, which has made me curious about the company. I decided to do my research on Intel and discover that it is an excellent opportunity for value and dividend investors to purchase the stock when undervalued.
I believe that, overall, the market is too bearish on Intel for now and that the company's shares offer considerable upside potential over the coming years, mainly thanks to a very low valuation. Intel also has access to very low-cost debt thanks to a strong balance sheet. In this article, I will write about what's happening with Intel stock and why it is an excellent stock to purchase for a long-term investment. The stock fundamental is very attractive, which has led me to want to invest when I have extra spare cash in my portfolio account.
Intel has been Under Pressure.
There is much negative news about Intel recently. The company has moved from a manufacturing crisis into the other. Like Apple Inc. (Ticker: AAPL), it has lost important customers and lost a substantial market share from aggressive rivals.
According to Mercury Research, Intel's market share in the x86 CPU market has dropped to 77.6%, while that of the server x86 CPU and desktop x86 CPU has fallen to 93.4% and 79.9%, respectively. This trend will continue in the near term as AMD and Nvidia continue putting the firm under pressure.

Intel is also stuck at the 10nm chips and is having difficulties moving to 7nm. After a series of delays, the company expects to launch them in 2022. It's going to be challenging to acquire the market share that its rival has already taken. By that time, Taiwan Semiconductor (Ticker: TSM) will be mass-producing its 3nm chips. And this year, AMD is already distributing its 5nm chips and will continue distributing its already successful 7nm chips.
Intel has struggled despite the fact it is a much bigger company than its peers. The company spends more than $13 billion annually on research and development. Nvidia spends more than $3 billion, while AMD, under Dr. Lisa Su's leadership, spends just $1.8 billion.

Intel's Microsoft Problem.
Intel also faces other significant challenges. For instance, Microsoft is reported to be building its own chips based on the ARM infrastructure for servers and PCs. Microsoft and the device-makers that use its software like HP (Ticker: HP), Dell (Ticker: DELL), and Lenovo (Ticker: LNVGY) are the biggest buyers of Intel's chip. Therefore, Intel will be under more pressure if Microsoft manages to manufacture its own chips that perform like the M1.

So, Why is Intel a Great Investment?
Intel Corporation (Ticker: INTC) stock has been beaten down severely. Intel's weak share price performance during 2020 has made its shares very inexpensive. I have explained what's going on with Intel and why it's under much pressure. I will explain why Intel is an excellent long-term investment despite many negative noises about the company.

1. Intel is a Cash Cow.
Intel Corporation is a cash cow machine. The company generates huge free cash flow compared to competitors. Based on management's guidance, shares are trading at a price-to-earnings ratio of 10. My FCF estimate of $20 billion for the current year also results in a 10 times FCF multiple, which looks almost absurdly low compared to the FCF multiples of AMD, Taiwan Semiconductor, and other peers are trading at. At an FCF multiple of 10, Intel can payout 10% of its share price to investors every year through dividends or share repurchases.
This should result in a substation boost to shareholder's total returns, as not a low of business growth is required to make a 10%-yielding Intel an attractive investment. This is taking into account that Intel does not produce any business growth. If Intel just kept its top line and profits flat forever while paying out 2.56% a year in the form of dividends and repurchasing 7% of its shares annually, investors could assume that they would generate long-term returns of 10%

2. Intel's $17 Billion in FCF is after spending $13 billion on R&D. 
Intel spends massively on R&D. Critics would say most of that spending must be for naught because Intel seems to be behind the game on new products and technology.
I believe a significant amount of that money spent on R&D is going to help Intel be competitive again. They are working on a competitive response to the threat ARM chips have on their market. Intel's huge FCF and R&D assures me that they will come up with competitive products.
3. Amazon is Now Using Intel for AI. 
About a year ago, Intel purchased Habana Labs, an AI company. And, lo and behold, AMZN recently chose Habana for its Gaudi chips to power AWS web AI services. This was a coup since they won the bid over Nvidia.
Maybe Nvidia should be concerned about Intel rather than vice versa. After all, Intel's $30 billion per year in R&D and FCF can fund many new and competitive products, including AI.
4. Amazon and Intel Continue to Partner on HPC.
HPC (High-Performance Computing) is a market that demands processing large amounts of data and making complex calculations at very high speeds. The 2020 HPC market is about $38 billion growing to about $50 billion in 2025. Intel dominates this market.
5. Intel Has a Great Tracking Record For Paying its Dividends to Shareholders.
At the current price, Intel is yielding 2.56% in dividend yield. Moreover, it has a meager payout ratio of 0.26 (26%). This shows that Intel can increase its dividends towards the future. The growth rate of dividend increase over the past five years has been about 7.1%.
Because I am a dividend growth investor, I like the dividends that Intel provides. Intel still has much room for it to grow its dividends towards the future. 
6. Intel Has a Great Financial Record.
As a value investor, I always see a company's financial history. When taking a more in-depth look at Intel, I see that the company is solid. The company has always managed to grow its revenue and earnings over the past 15 years. The company hasn't had any net loss for the past 15 years. This shows how Intel is always generating profit for investors.

The company also has excellent financial metrics. For instance, the debt-to-equity ratio is low. This shows how the company doesn't inquire much debt that can potentially cause financial difficulties in the near term. Also, if you take a look at the company's gross margin, it shows how Intel can maintain being profitable over the past years.
After looking at Intel's financial record, I am convinced that Intel is a solid company. I am not worried about its financial outlook since the company is very good at managing its business.

What am I going to do about Intel?
So far, I have mentioned all the pros and cons of Intel. After researching Intel, I am an optimist about the company to be an excellent long-term investment. I already have shares of Intel in my portfolio, but it's not that much. I will purchase more Intel stocks into my portfolio using the money from the monthly contribution and dividend payout I receive. Hopefully, I can have a sizeable weighted position of Intel stock in my portfolio.
I'm not recommending Intel shares because I think it's well managed. I'm recommending Intel because of its meager price and massive potential for a turnaround. The company has a robust free cash flow that could do many things that will enhance its future prospects, like buying Habana Labs, spinning off its fabs, increasing the dividend, and buying back shares.

I hope this article about Intel stock can help readers understand what's going on with Intel stock. Indeed, the companies are facing many challenges that put pressure on the stock price. However, Intel is trading at the current price is an excellent value for value investors who invest in the long run. I believe investors should ignore Intel's market noises and see the stock from another point of view. Intel is a great cash cow generating company that is trading at a bargain. I hope readers can get my investment point of view on Intel and make a better decision whether Intel is a buy or not.

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