Company Overview: Intel Corporation (NASDAQ: INTC) is a leading technology company focused on designing and manufacturing semiconductors using the intelligent cloud, network, edge, and other computing devices. It primarily generates revenue from its platform products, including a wide variety of components and technologies, such as microprocessors and chipsets, stand-alone SoCs, or multichip packages. It also manufactures and sells non-platform and complementary products, providing comprehensive platform solutions to its clients globally.

INTC Details

Key Takeaways from Q2FY21 (ended June 26, 2021)

• Flat Revenue Growth: In Q2FY21, the company's total revenue amounted to USD 19.63 billion, representing a slight 0.49% decline year-over-year from USD 19.73 billion.
• Increase in Gross Margin: INTC's gross profit for Q2FY21 was USD 11.21 billion vs. USD 10.51 billion reported in Q2FY20, representing a gross margin of 57.1% (up 3.8% year-over-year).
• Improvement in EPS: Diluted earnings per share (EPS) for Q2FY21 was USD 1.24, higher than USD 1.19 in Q2FY20.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On September 01, 2021, INTC announced a partnership with Juniper Networks to improve and expand the scope of the Open Radio Access Network (ORAN) ecosystem.
• On August 27, 2021, its subsidiary Mobileye partnered with ZEEKR, an international electric mobility technology brand, to jointly develop the world's most advanced safety technology for the advanced driver-assistance systems (ADAS) industry.
• On August 25, 2021, Wind River announced that it had developed a 5G virtual radio access network (vRAN) solution integrating INTC's FlexRAN software for 3rd Gen Xeon Scalable processors.
• On August 24, 2021, the company collaborated with Submer to develop the Precision Immersion Cooling Fluid Cloud for next-gen data centers.
• On August 23, 2021, INTC announced that it would provide phase one commercial foundry services under the US Department of Defense's multi-phase Rapid Assured Microelectronics Prototypes - Commercial (RAMP-C) program.

Other Key Findings in Q2FY21

• The company’s revenue-generating operating segments are Client Computing Group (CCG), (Data Center Group) DCG, Internet of Things Group (IOTG), Mobileye, Non-Volatile Memory Solutions Group (NSG), and Programmable Solutions Group (PSG).
• In Q2FY21, INTC invested USD 3.5 billion for manufacturing advanced semiconductor packaging technologies in New Mexico.
• During the quarter, the company launched 12 new processors, comprising 11th Gen Intel Core with Iris Xe graphics and Xeon W-11000 processors. It plans to launch over 300 designs in FY21.
• It also collaborated with Microsoft to provide Intel Bridge Technology on Windows PCs, offering better mobile experiences.

Revenue by Segment; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Improvement in Cash Balance: The company exited Q2FY21 with a cash balance (including short-term investments and trading assets) of USD 24.86 billion, 4.03% more than USD 23.90 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in H1FY21 was USD 14.29 billion vs. USD 17.32 billion in H1FY20 due to the Corporate VLSI charge, payment under a prepaid supply agreement in Q1FY21, and higher income taxes.
• Reduction in Debt: INTC's total outstanding debt amounted to USD 35.41 billion at Q2FY21 end, lower than the reported total debt of USD 36.40 billion as of December 26, 2020.

Key Metrics: In Q2FY21, INTC's EBITDA and operating margins were 44.4% and 28.3%, higher than the industry median of 25.3% and 17.9%, respectively. ROE stood at 6.1% vs. the industry median of 4.7%. Debt/Equity was 0.42x as of June 26, 2021, vs. 0.47x as at Q2FY20 end.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 26.79% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 8.32% and 5.26%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Customer Concentration: INTC generated 39% and 41% of FY20 and FY19 net revenue, respectively, from its top three customers, and it anticipates generating a substantial amount of revenue for a small customer group in the future as well.
• Cyber Threats: The company regularly faces the threat of hackers trying to gain illegal access or introducing corrupt software to its IT systems.
• Global Operations: INTC operates globally, and sales outside the US represented 79% of its revenue for FY20. Revenue from China comprised 26% of its total FY20 revenue. Global factors such as trade tariffs/barriers, economic or political disruptions, etc., can affect the company's operations.
• Stiff Competition: The semiconductor industry is highly competitive, and the technological and market developments are generally rapid. If the company fails to adapt to these changes swiftly, its products and solutions could become uncompetitive/obsolete.

Outlook

• INTC announced its plans to make various developments and advancements in the field of semiconductor processes and packaging in the near future. Building on this plan, during Q2FY21, it made some changes to the organization. It appointed well-known technologists to its team to boost the execution and innovation in its primary business segments.
• On a non-GAAP basis, the company expects to generate USD 18.2 billion in revenue in Q3FY21, with a diluted EPS of USD 1.10.
• Its FY21 revenue estimate is USD 73.5 billion (a USD 1.0 billion increase from previous guidance), with a diluted EPS of USD 4.80 (increased from the prior estimate by USD 0.20).
• The company also expects to incur USD 19 – 20 billion in capital expenditures, and the free cash flow is estimated to be USD 11 billion.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, INTC corrected ~11.90%. The stock is currently close to the mid-point of its 52-week range of USD 43.61 to USD 68.49. We have valued the stock using the Price/Earnings multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the customer concentration, increasing cyber threats, and risks associated with the revenue generated outside the US. We have taken peers such as Micron Technology, Inc. (NASDAQ: MU) and QUALCOMM Inc. (NASDAQ: QCOM). Considering the decent top and bottom-line performance, strategic growth initiatives, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 53.51, down ~0.41% as of September 03, 2021.

INTC Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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