Intel: A Potential 'Kitchen Sink' Moment

1 year ago

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The oversea is endless erstwhile you are successful a rowboat."― Adolfo Bioy Casares

Wednesday morning, Intel (NASDAQ:INTC) announced it was cutting its quarterly dividend by two-thirds successful bid to sphere 'financial flexibility'. This is just nan latest successful a bid of bad news for shareholders who saw this banal get astir trim successful half successful 2022. However, nan equity is trading level successful ray to nan first guidance to nan slashing of its payout. Is nan large dividend trim a 'kitchen sink' infinitesimal that will beryllium nan past of nan drip, drip, drip of antagonistic news travel aliases is much symptom connected nan sky for this tech icon? An study follows below.

Company Overview:

Based successful Santa Clara, California, Intel Corporation is 1 of nan world's apical 2 manufacturers of semiconductors - Taiwan Semiconductor Manufacturing Company (TSMC) being nan different - pinch nine accumulation accommodation successful nan U.S., Ireland, Israel, China, Malaysia, and Vietnam. Intel was founded successful 1968 by Gordon Moore (of Moore's Law) and Robert Noyce and is virtually responsible for putting nan silicon successful Silicon Valley. The institution went nationalist 2 years later, raising gross proceeds of $6.8 cardinal astatine $0.02 a share, aft adjusting for 13 banal splits - pinch nan past 1 occurring successful 2000. The banal trades adjacent $26.00 a share, translating to a marketplace headdress of conscionable southbound of $110 billion.

Operating Segments

The semiconductor shaper operates done six units: Client Computing Group (CCG); Datacenter and AI Group (DCAI); Network and Edge Group (NEX); Accelerated Computing Systems and Graphics Group (AXG); Intel Foundry Services (IFS); and Mobileye (MBLY).

CCG creates semiconductors (most notably, nan Intel Core processor and x86 bid of instruction sets) for desktops, laptops, notebooks, 2-in-1s, amongst others. Intel is nan marketplace leader successful this mature class that is expected to turn successful nan debased to mid-single digits to $90 cardinal by 2026. CCG was responsible for FY22 conception operating income of $6.3 cardinal connected gross of $31.7 billion, which represented important declines of 60% and 23% (respectively) from FY21 operating income of $15.7 cardinal connected gross of $41.1 billion.

As nan sanction implies, DCAI develops information halfway and artificial intelligence products (most notably, nan Intel Xeon processor). These categories are expected to grow into a $65 cardinal opportunity by 2026. DCAI accounted for FY22 conception operating income of $2.3 cardinal connected gross of $19.2 billion, which for illustration CCG were down profoundly from operating income of $8.4 cardinal connected gross of $22.7 cardinal successful FY21, representing 73% and 15% declines, respectively.

NEX provides server solutions passim nan web to nan intelligent edge, chiefly to endeavor level customers pinch offering specified arsenic its Intel Atom processor. This vertical is expected to turn astatine a debased double-digit CAGR to $75 cardinal successful 2026. NEX contributed FY22 conception operating income of $740 cardinal connected gross of $8.9 cardinal versus FY21 operating income of $1.71 cardinal connected gross of $8.0 billion.

AXG delivers high-performance computing and graphics solutions for endeavor and information halfway applications, a marketplace expected to scope $100 cardinal by 2026. The portion mislaid $1.7 cardinal of operating income connected gross of $837 cardinal successful FY22, arsenic compared to a nonaccomplishment of $1.2 cardinal connected gross of $774 cardinal successful FY21.

IFS is Intel's afloat vertical, standalone foundry business that provides third-party manufacturing for bespoke merchandise needs. To bolster its capabilities successful this area, nan institution is successful nan process of acquiring specialty analog semiconductor foundry Tower Semiconductor (TSEM) for $5.4 cardinal pinch expectations for nan woody to adjacent sometime successful 1H23. The mature foundry business is expected to beryllium a $140 cardinal opportunity successful 2026. After generating a conception operating nonaccomplishment of $23 cardinal connected gross of $786 cardinal successful FY21, IFS mislaid $320 cardinal connected gross of $895 cardinal successful FY22.

Mobileye was nan company's driving assistance and self-driving solutions unit. It was spun retired successful an IPO successful October 2022. Intel still owns 93.5% of nan concern, which is presently weighted astatine $35.2 billion. Albeit a mini contributor for illustration AXG and IFS, this conception was nan only 1 to show betterment connected some nan operating income and gross lines FY22 versus FY21, pinch operating income expanding 25% to $690 cardinal and gross rising 35% to $1.9 billion.

Strategy:

Shortly aft CEO Pat Gelsinger returned to nan institution wherever he worked for 30 years - including a stint arsenic nan company's first Chief Technology Officer - he began implementing Intel's IDM (Integrated Device Manufacturer) 2.0 strategy successful February 2021, which is an effort to re-establish Intel's ascendant position successful nan chipmaking world aft a decade of mediocrity, mislaid business (see Apple (AAPL)), and marketplace share. The strategy revolves astir 3 basal tenets.

First, nan institution is initially investing tens of billions of dollars into capacity description initiatives successful Arizona, Ohio, Oregon, (as good arsenic Germany and Ireland) to not only summation accumulation of its ain offerings, but besides bring manufacturing capacity backmost to nan U.S., wherever only 4.5% of nan world's semiconductor manufacturing capacity exits. By contrast, Asia holds 88% of that capacity, which was periodically unopen successful by nan pandemic. Intel will person U.S. authorities incentives from nan $52.7 cardinal CHIPS Act for improving nan home proviso concatenation and bringing jobs backmost to America. Second, nan institution intends to grow its usage of third-party foundry capacity for immoderate of its offerings. Third, it intends to go a meaningful subordinate successful nan foundry business pinch nan constitution of IFS, which will effort to utilization definite geographical, technological, and capacity gaps that presently beryllium successful nan industry. In summation to IFS, guidance sees maturation opportunities successful AXG and Mobileye.

Execution and Share Price Performance

After producing non-GAAP EPS of $5.10 connected gross of $72.9 cardinal successful FY20 and non-GAAP EPS of $5.47 connected gross of $74.7 cardinal successful FY21, Intel expected to present FY22 non-GAAP EPS of $3.50 connected gross of $76.0 cardinal pinch 52% non-GAAP gross separator astatine nan onset of that year. As tin beryllium gleaned from nan conception results above, nan institution disappointed acutely.

With downward revisions provided passim nan twelvemonth blamed connected mediocre PC, notebook, and handset request (and supply! - constituent proviso tightness and logistical constraints); excessively overmuch customer inventory from overstuffing nan transmission successful anterior periods; little spending from information centers and server clients; macroeconomic headwinds; and continued marketplace stock losses (which person occurred since 2018 - specifically to AMD (AMD)), Intel's FY22 was an unmitigated disappointment. It vanished nan twelvemonth pinch non-GAAP EPS of $1.84 connected gross of $63.1 billion, pinch gross separator astatine 47.3%. The institution did 'right-size' itself successful 4Q22 pinch anticipated savings of $3 cardinal successful FY23 and ~$9 cardinal by FY25 - somewhat confounding considering its monolithic capex walk to bring further capacity connected statement complete nan adjacent mates of years.

To make matters worse, erstwhile Intel reported these results connected January 26, 2023, it did not supply an FY23 forecast, only 1Q23 guidance, which was abysmal. The institution expects to make a nonaccomplishment of $0.15 a stock (non-GAAP) connected gross of $11 cardinal pinch gross separator astatine 39.0%, representing declines of 117%, 40%, and much than 1,400 ground points year-over-year, respectively.

Balance Sheet & Analyst Commentary:

Owing to its atrocious execution, rate provided by operating activities declined from $29.5 cardinal successful FY21 to $15.4 cardinal successful FY22. Factor successful its important superior investments, and Adj. interest rate travel was antagonistic $4.1 cardinal for nan year. With rate and short-term investments totaling $28.3 cardinal and short-term indebtedness of $4.4 billion, Intel's equilibrium expanse is successful decent style and will beryllium further enhanced by a greatly reduced quarterly dividend payout going forward.

The Street has been antagonistic and correct connected Intel for a while, presently featuring only 1 outperform and 2 bargain ratings against 17 holds, six underperforms, and six sells. Their median twelve-month value nonsubjective is $28 a share. Although guidance is not providing immoderate FY23 guidance, nan Street's mean conjecture is for net of $0.55 a stock (non-GAAP) connected gross of $50.8 billion, representing 70% and 19% declines against a unspeakable FY22. The Street is much optimistic connected FY24, pinch statement calling for non-GAAP net of $1.88 a stock connected gross of $58.5 billion.

Certainly much sanguine than nan Street are CEO Gelsinger and CFO David Zinsner, who each purchased ~9,000 shares betwixt January 30-31, 2023.

Dividend Cut Significance:

Today's dividend trim will person 2 awesome impacts. The first is that income investors who were holding nan banal are apt to beryllium a trading headwind complete nan coming days arsenic they waste disconnected their shares. The equity has gone from northbound of a 5 percent output earlier today's announcement, to conscionable nether a 2 percent yield, making it non-attractive to income investors.

The reduced payout evidently helps, but not lick nan company's existent rate pain complaint issues arsenic Intel is improbable to gain capable to screen its reduced dividend payout complete nan adjacent 12 months. Personally, I would person alternatively seen guidance suspend each dividend pay-outs until activity had righted nan vessel and regained credibility successful investors' eyes. If you are going to return a band-aid off, it is amended to rip it each nan measurement disconnected and quickly successful my opinion.

Verdict:

The banal fell astir 50% successful 2022 arsenic Intel's challenges mounted. Operationally, it does not look if location will beryllium immoderate uptick successful PC request pinch units shipped projected to by 6% little FY23 versus FY22, which was down 16% versus FY21. Morgan Stanley (MS) lowered their 2023 forecast for PC request yet again yesterday.

As such, maturation is going to person to travel from IFS, but nan conception has yet to beryllium that it tin motion up customers, though it should beryllium positioned to do so. Tower should help, but it only generated gross of $1.68 cardinal successful FY22, up 11% from nan anterior year. Intel is going to walk arsenic overmuch arsenic $50 cardinal to toggle shape itself betwixt FY22 and FY24, which will eat into rate if operations proceed to plunge. After a horrid FY22 followed by an moreover worse opening to FY23, Intel is simply a show-me stock.

That said, shares of INTC person hovered betwixt $25 and $30 since mid-September 2022. One logic for this support successful nan mid-twenties is nan embedded worth of Mobileye. Currently weighted by nan marketplace astatine $35.2 billion, Intel's stock is $32.9 billion, aliases astir $8 a share. That algebra presently values nan chipmaker's different 5 segments, which generated 97% of its apical line, astatine conscionable nether $20 a share, aliases $81.3 billion.

Even though nan banal has recovered stability, operationally, nan institution is poised to present 4 consecutive really putrid quarters pinch nary motion yet of a bottom. One twelvemonth ago, guidance hinted that FY23 gross would attack aliases transcend $80 billion. The Street is now calling for $50.8 billion. As such, nan truth that nan 2 generators of that pathetically bad forecast - nan CEO and CFO - precocious purchased banal does not clasp arsenic overmuch weight arsenic it usually would.

The banal is rangebound and pinch it erstwhile 5.5% dividend yield, it would usually mightiness person made for a decent covered call candidate. However, until location is immoderate stableness operationally, nan proposal is to enactment connected nan sidelines.

When you're astatine nan extremity of your rope, necktie a knot and clasp on."― Theodore Roosevelt

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