Intel (INTC) has fallen technologically behind the competition over the last few years, which has led many investors to believe Intel is dead in the water. To correct Intel's course, former CTO Pat Gelsinger returned to Intel as CEO in February 2021.
The groundwork is now being done to expand into the lucrative foundry business while continuing the core x86 CPU business. The current macroeconomic and geopolitical climate is beneficial for Intel. I am bullish on Intel because of its long-term growth potential.
Expanding into the Foundry BusinessHistorically, Intel has only designed and manufactured its own chips in its foundries. Intel is now opening up its foundries to third parties and expanding its capacity.
The foundry business has enormous barriers to entry; luckily, Intel meets them. One of the key barriers is access to the technology needed to create modern chips. Intel has an existing investment in ASML Holding (ASML), the only company to provide machines for extreme-ultraviolet lithography (EUV).
ASML is also the only company producing the machines for High-NA EUV, which is expected to be used for Intel's 18A process in 2025. Even though Intel has a 15% stake in ASML, it still has to back order the $150+ million machines, showing how difficult it would be for a new player to start manufacturing modern chips.
Intel is rapidly expanding its foundry capacity. Some of the notable investments Intel has made to expand capacity include: investing €33 billion into operations across Europe, acquiring Tower Semiconductors for $5.4 billion, investing over $20 billion into two new foundries in Ohio, and $20 billion for two foundries in Arizona.
The expansion allows for Intel to turn the threat of ARM and RISC-V architectures into an opportunity. Apple (AAPL) dropping Intel for its own Apple M1 chips was a major blow to Intel. Intel could potentially win back Apple for manufacturing its ARM-based M1 chips.
The M1 chip is currently produced by Taiwan Semiconductor Manufacturing Company or TSMC (TSM). Apple switched to TSMC because TSMC is able to manufacture a more effective node. The switch ultimately allowed Apple to have similar performance with more battery life due to the superior node and ARM architecture.
The crux of Intel investing in foundries is if it is unable to regain technological dominance. If it can't regain dominance, high-end silicon customers like Apple will remain at TSMC. On the other hand, if Intel is able to gain industry dominance, even direct competitors Advanced Micro Devices (AMD) and Nvidia (NVDA) would likely flock to Intel foundries.
Intel has relied purely on improving other chip processes over raw transistor size reductions for years now. Intel's non-density innovation is illustrated by continuing performance improvements on the 14nm transistor over its extended lifetime.
One of the key introductions is the use of chiplets instead of the traditional monolithic system on a chip (SOC). Chiplets allow for better yields, reducing wasted silicon wafers and offering better optimization for specific uses.
In summary, Intel is setting itself up for the long game, investing heavily to expand its business.
Macro EnvironmentThe current macro environment is beneficial to Intel. Geopolitical tensions and supply chain issues have pushed the U.S. and EU to invest heavily in localizing semiconductor manufacturing.
TSMC, which is located in Taiwan, is estimated to produce more than 90% of the world's advanced chips. China has had a perpetual threat to invade Taiwan. A Chinese invasion is a threat to the international semiconductor industry. To defend against losing access to vital chips, both the U.S. and EU are looking to localize manufacturing.
The Innovation Act, which is making its way through Congress, would give the semiconductor industry $52 billion in funding. Intel would be the likely recipient of the lion's share as Biden praised the company during the Union Address. If passed, Intel will pour another $80 billion into its Ohio foundries for a total of $100 billion.
On the other side of the Atlantic, the European Union is pushing for 20% of total chips manufactured to come from the EU by 2030. The EU has a planned investment of $49 billion. As a result, Intel is investing €33 billion into fabrication and research across the Union.
Intel is deepening relationships with both sides of the Atlantic, which will allow for long-term growth.
Funding InvestmentsDue to the rapid investment, CapEx hit an all-time high of $20.3 billion in 2021, a 40.7% increase year-over-year. The question is, can Intel keep up the spending?
Intel should be able to continue to have heavy investment into expanding its foundry segment.
Intel had a free cash flow of over $9.6 billion in 2021. The fact that Intel is able to retain a positive free cash flow after investing heavily is promising.
Intel is spinning off its autonomous driving business Mobileye as an IPO. Mobileye is expected to be valued at more than $50 billion. Intel is going to retain a majority of shares, so it could sell up to $25 billion while retaining a majority. The cash injection will help pay for immediate investments.
As a last line of defense, Intel would be able to drop its dividend and share buybacks, but the market will punish the stock price if this occurs.
The bearish case against Intel's finances is the stagnation of growth. Revenue only grew 1.5% year-over-year for 2021 and is expected to drop for Q1 2022.
EPS is in a worse state than revenue; EPS fell 7.5% in 2021. The Q1-2022 guidance shows a 40% decline in EPS for the quarter to $0.80.
The lack of growth is exhibited in the low P/E of 10.6.
Ultimately, Intel is pushing for long-term growth, but the trade-off is that short-term growth will most likely be negative or insignificant.
Wall Street's TakeTurning to Wall Street, Intel is a Hold base on eight Buys, 13 Holds, and seven Sell ratings over the last three months.
The average Intel stock price target is $53.90, representing 4.9% upside potential.
ConclusionIntel's short-term stagnation should be made up for in the long term. I am more bullish than analysis consensus; I believe Intel is a Buy.
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Nvidia’s (NVDA) latest Investor Day amounted to a celebration of artificial intelligence (AI). And according to CEO Jensen Huang, every industry will be transformed by the tech, which by the looks of it, is good news for the chip giant.
The company announced several new hardware products, ranging from CPUs (Grace Superchip), Networking (Spectrum-4 ethernet platform) and Systems (DGX H100). But the most eye-catching of all was the unveiling of the next-gen H100 Data Center GPU which is based on NVDA’s Hopper architecture.
For AI use cases, Nvidia's GPUs are already the dominant force in the market and the latest release should further cement its leading position. According to the company, the H100 can help cut the time it takes to train AI models from weeks to days in some cases.
The company’s new "Eos" supercomputer will also be constructed utilizing the H100. When it starts operating later in 2022, Nvidia claims it will be the world's fastest AI system.
Perhaps even more enlightening, says Deutsche Bank’s Ross Seymore, were the software announcements. These included new and upgraded AI software tools for speech recognition and translation, smart recommendations and AI enhanced audio and video, amongst others. The company also detailed its growth drivers (Nvidia AI, Omniverse), and said the long-term TAM for the software segment stands at ~$300 billion.
That forms part of what Nvidia believes is a total SAM (service addressable market) of $1 trillion. While Seymore says $1 trillion may “prove optimistic,” the 5-star analyst thinks NVDA is uniquely “suited to benefit from the growth of AI in hardware and potentially software.”
“However,” Seymore went on to say, “from an investor perspective, we believe much of this future growth potential is already captured in NVDA’s premium multiple.”
As such, given the “valuation premium,” the fact no F1Q guidance updates were provided and the shares’ recent strong run, Seymore sticks with a Hold rating and $285 price target. (To watch Seymore’s track record, click here)
However, most of Seymore’s colleagues disagree. 4 other analysts join Seymore on the sidelines but with 18 additional Buys, the stock boasts a Strong Buy consensus rating. Going by the $349.05 average target, shares are anticipated to rise by 36% over the coming months. (See Nvidia stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.