Intel is one of the true heavyweights in the semiconductor industry .
I would like to discuss with you why I think Intel is a sleeping giant ready to regain its territory. I will not be comparing AMD’s (AMD) 7nm, 8 core laptop products with Intel’s 10nm, 4 core Ice Lake or the 14nm 6 core Comet Lakes offering or discussing clock speeds and heat signatures and such. You can read this in any of a dozen articles at various sites likely posted the same day you read this.
Nor will I discuss the virtues or shortcomings of silicon versus silicon carbide versus gallium nitride et al. There are hundreds of articles (and thousands of comments) that already reach deep into the weeds to shed light on why company X or company Y has the best chance of owning this space in the short term.
I offer instead a view on the investing merits of Intel. Of course, these are affected by staying on the leading edge of product development, but also by the strength of a firm’s marketing team, their reputation and longevity in delivering top-quality product, their ability to attract and retain top talent, their senior managers, national policies, global politics, and the depth and breadth of their R&D capabilities. These are the company-specific issues I am interested in.
To these I add the valuation metrics for the stock itself. It is easy to get lost in those weeds above, forgetting that we are trying to make great investments here, not out-shout someone about a particular chip or other product.
Yes, Intel stumbled when they announced they were behind schedule on delivering their new 7nm product. Whoopee-do. Companies announce delays all the time.
Is this a death-knell for Intel? No. Is it a wake-up call? Yes. And if the problem is one of manufacturing capacity rather than significant design flaws, there are other firms Intel can sub-contract to in order to get quickly up to speed.
I almost never buy 100% of my position at once. I am happy with a relatively small 350 shares for now. If it goes down, and the metrics I use to analyze a company remain the same or improve, I will buy more in additional tranches. If it goes up, I do not marry any stock. As it rises, I will place trailing stops.
MANAGEMENT AND WORKFORCE
This seems to be a very big concern of commenters and authors on this and other sites. The big knock against Intel’s CEO, Bob Swan, is that he is a “finance guy,” having been promoted from the Intel CFO position, not an engineer. The question seems to be, “How can he run a semiconductor company when he doesn’t understand the intricacies of the physics and engineering characteristics of the product?”
My answer is simple. I do not know Mr. Swan, who may or may not be a skilled CEO, but I know that there are hundreds of other executives who are fine leaders, keen judges of talent and excellent delegators.
Warren Buffett was never a railroad executive, bricklayer, candy-maker or fast-food executive. Yet Berkshire Hathaway’s 100%-owned Burlington Northern, Acme Brick, See’s Candies and International Dairy Queen seem to be doing just fine.
Chuck Schwab had never run a discount brokerage firm when he saw an unmet need 1975, the year the SEC began to allow negotiated commission rates.
I could name hundreds of other fine executives and strong entrepreneurs who succeeded in areas they knew little about or in evolving areas, like discount brokerage, that no one knew anything about.
How did men and women like these succeed? They knew their own strengths and their own weaknesses, and they surrounded themselves with talented individuals to do the things they were not good at. (Okay, maybe Chuck missed one or two since he added my little firm to his stable with nothing more than a handshake. Hey, everybody’s entitles to the occasional mistake!)
Let’s take a look at some of the senior folks at Intel. First, a couple board members:
Chairman of the Board: Dr. Omar, CEO and Chairman of Medtronic (MDT), a global leader in medical technology, from 2011 until April of this year. Ph.D. in electrical engineering.
Director: Dr. Tsu-Jae King Liu, Professor, Electrical Engineering and Computer Sciences and Dean of the College of Engineering, UC .Berkeley. Holds more than 90 patents. Current research focused on nanometer-scale logic and memory devices, and advanced materials, process technology and devices for energy-efficient electronics.
Director: Alyssa Henry, who oversees global engineering, product management, design, sales, marketing, partnerships and support for e-payment firm Square Inc (SQ). She was previously vice president of Amazon Web Services Storage Services (AMZN)and at Microsoft (MSFT) working on databases and data access technologies in a variety of engineering, program management and product unit management roles.
Director: Andrew Wilson, CEO of Electronic Arts Inc. (EA).
And here are a couple management team members, chosen at random since there are so many:
Dr. Peng Bai (Co-Director, Logic Technology Development), Google Scholar. PhD in Mechanical Engineering plus post-doc research Dept of Chemical Engineering at MIT.
Lisa A. Spelman (General Manager of Intel® Xeon® products and data center marketing.) Before joining Intel IT operations, Spelman spent two years as technical adviser to Intel’s chief information officer.
Richard L. Coulson (Senior Fellow and director of the Storage Technologies Group.) Holds more than 40 Patents. BS in Electrical Engineering and Computer Science from University of Colorado, MS in Electrical Engineering from Stanford.
Leading-edge companies attract great talent. If Mr. Swan can continue Intel’s history of creating a workspace that rewards innovation, he does not need a PhD in electrical engineering. He just needs to determine the course, express it clearly, and reward the innovators.
MARKETING AND REPUTATION
“Intel Inside.” The complexities of brilliant marketing would demand a book-length analysis – and there are many out there. Suffice it to say that the goal of marketing is not only to sell a product but to make the buyer integrate the experience of so doing with an emotional sense of well-being, cleverness, group identity, community or some other factor.
“Intel Inside” does just that. At the consumer level, buyers feel much more comfortable with a product they already know and trust when considering a new product.
Apple (AAPL) is a past master at this. I just saw a “Blondie” cartoon where Dagwood’s son tells Dagwood in the first panel that he needs a new laptop. Second panel: Dagwood says, “Why? Is yours broken?” Third panel: His son just looks at Dagwood as if he is from Mars. Fourth panel: The son sees Sis and says, “Dad sure has weird ideas about computers.”
Apple sells wonderful cell phones and I imagine still sells great computers. I wouldn’t know about the latter. I still have my 2011 version of the MacBook Air. If ever it dies, I am predisposed to buying another. Quality workmanship and superb customer service have sold me.
But where Apple excels is in making people believe that quality workmanship and superb customer service are not the point. Being up-to-date, cool, woke, kicky – that is what is important. People will take a perfectly wonderful iPhone they paid $700 for and trade it in for half that just so they can buy another iPhone, incrementally different, for $1000.
Intel doesn’t rally have to work that hard. After years of reinforcing the brand most people accept the fact that if it has Intel inside it is a higher-quality product and probably also ahead of the competition.
Many times in the past, the competition has stolen the march on Intel. Their product may actually be better – but the buyer does not get the same warm fuzzy from the competition’s product. This is one of those times. I would suggest that because of Intel’s reputation — and marketing – that there are many, both consumer and corporate, that would rather have what they perceive as the higher reliability, after-the-sale service, and willingness to work together with the buyer, who will still buy Intel.
Intel has been leapfrogged before. It seems to bring out the best, and the beast, in INTC’s corporate culture. Competitors need to enjoy their day in the sun. Intel will not take being the #2 for long.
One final thought on reputation and how marketing, no matter how expensive or seemingly persuasive, can not overcome a declining reputation:
I wrote a “Bearish” article on Boeing (BA) in January (Why I Won’t Be Buying Boeing (NYSE:BA)) that engendered lots of disagreement. The stock was at 316 when I wrote it. It is nearly half that today. My primary argument against Boeing was and is that this great American company has destroyed its reputation by taking shortcuts with the t37MAX, covering up those shortcomings, then screwing up the defense side of their business by delivering shoddy product to the US Air Force.
Boeing may once again be a great company. If it succeeds, it will not be because they spend hundreds of millions of dollars on slick marketing and advertising. It will be because they have restored their reputation for building quality products and are honest and transparent in their dealings. Reputation trumps billions in mere advertising.
RESEARCH AND DEVELOPMENT
This will be a short couple of paragraphs…
No competitor has anywhere near the R&D budget that Intel has.
If we combine that resource with Intel’s continuing cash flow, a work force that feels proud to say they work at Intel, and the appropriate rewards for those loyal employees, Intel will once again regain its #1 title.
In the fast-changing world of semiconductors you must devote appropriate (read: huge) amounts of capital to R&D. INTC spends more on R&D than Taiwan Semiconductor (TSM), Advanced Micro Devices (AMD) and NVIDIA (NVDA). I do not mean they spend more than each of these fine firms. I mean they spend more than all of them combined.
One might say, “Yes, but Intel doesn’t spend the money as wisely as, say, Competitor XYZ.” Maybe not. But if you need to chop firewood, a brilliant crafted hatchet is still not as effective as a finely honed axe. In R&D in this industry, Intel wields the logger’s axe.
NATIONAL POLICIES & GLOBAL POLITICS
Politicians can screw anything up. “At their best” they produce only the appropriate amount of regulation to ensure a fair and equal playing field within which companies and individuals can excel. Politicians are seldom “at their best.”
Anything is possible even if it makes no sense whatsoever. Some future US leadership may decide that the meritocracy of hiring the best and the brightest and rewarding them for work well done is unfair to some constituency that they need in order to keep themselves in office.
In that case, companies will simply have to adapt. Maybe they will ascend to the Swiss corporate model where employees without the necessary skills are paid to learn on the job at a low level of pay, which is then increased as they learn and become more valuable to the team.
Or maybe US politicians will raise taxes to such an untenable level that only those firms willing to relocate beyond US boundaries, or have 90% of their workers outside the US, or subcontract all their manufacturing elsewhere and keep only their design staff in the US (or not.)
One of the things that makes Intel unique is that some 80% of its manufacturing is done in the USA. Nividia, AMD and others already outsource all or most of their manufacturing to Taiwan, South Korea, the PRC or elsewhere. Difficult as the politicians can be in the US, it sure beats the worst-case possibilities overseas.
After all the time in spent around the world in the military, I hold the primary offshore competitors and colleagues of Intel in high regard. The nations of Taiwan, South Korea and Taiwan are not only democratic capitalist allies, they have highly-skilled, well-schooled and innovative work forces. However, there are always geopolitical “possibilities.”
I do not think it is likely that North Korea will attack the Republic of Korea. Kim Jong Un would have to be mad, knowing the easy life he and his close cohorts live while starving their own country’s people, to bring it all to an end. Within five minutes of an incursion he and his family would be dead. And regardless of the befuddled nonsense you may read by those who have never studied the issue or spent time in the area, Kim is not a madman!
By the same token, Xi Jinping would be a fool to try to integrate the free people of the Republic of China (Taiwan) into the people’s paradise he envisions on the mainland. But even one “accidental” missile into a TSM semiconductor fabrication plant (“fab” or “foundry”) or, far more likely, sabotage by agents of the PRC there, would be devastating to the entire industry.
We live in interesting times and national policies, global and national trade policies, conflict, intimations of war, etc. can all raise their head at any time.
If you want to see just how widely-spread – and yet how concentrated the bulk of these fabs – are, take a look at this way too long to reproduce list is from Wikipedia: List of semiconductor fabrication plants.
Finally, while on the subject of national and global politics, please note that the largest R&D country spending is still the US:
R&D Spending by Country 2018 and 2019 Final
I consider Intel a good purchase at current prices. Here are a few valuation metrics that reinforce my confidence in buying INTC today:
Source: Seeking Alpha
You will note that every single valuation metric favors INTC!
Intel has the lowest trailing twelve-month PE ratio as well as the lowest forward estimate. It has the most favorable PEG ratio. Its Price/Sales ratio is well ahead of the pack, as is the EV/EBITDA metric, Price/Book and Price/Cash Flow.
However, Intel’s revenue growth metrics are behind AMD and NVIDIA in some areas, besting only QCOM in most growth metrics. Looking ahead, most analysts are predicting lower growth than among the three competitors above. I think they are wrong.
In terms of profitability…
…again INTC is number one in all metrics but Net Income per Employee which NVIDIA is a nose ahead. Remember, however, that these profitability metrics only measure the present. If you are a hard-core believer in AMD or some other competitor you might believe all this is just current history and will somehow change going forward.
I don’t think so.
I think the quote misattributed to Admiral Yamamoto’s response to his almost-but-not-quite-successful campaign to destroy Pearl Harbor and the US battleship (but not the carrier) fleet is most appropriate to what this momentary setback has caused at Intel:
“I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” – some Hollywood scriptwriter
Wishing you excellent investing,
Disclosure: I am/we are long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Unless you are a client of Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence and not as advice to buy or sell specific securities.