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Summary of Operations
Intel is the world’s largest producer of semiconductors and computer chips, offering a diversified product portfolio for different computing needs: personal, server, cloud, graphics, Internet of Things and so on.
In 2021, Intel reported $79 billion in net revenue and about $12 billion in free cash flow. Dell, Lenovo, and Hewlett-Packard account for 43% of their net revenue. By region, China accounts for 27%, and Singapore and the U.S. each about 18%.
Strategy
With its healthy balance sheet and high cash generation, Intel sustains its own operations without taking on debt or needing to dilute shares. The company uses this cash to expand its manufacturing capabilities, in order to meet the demand of the current, global chip shortage and operate at a tremendous economy of scale.
Since Gellsinger returned as CEO, he has stepped up commitments to capex and R&D. This caused free cash flow in 2021 to be notably lower, as were the number of buybacks that had been increasing earnings per share the last five years. Gellsinger believes previous management neglected the underlying fundamentals of the company, hurting product quality and the brand. Recently, smaller semiconductor manufacturers have been capturing market share from under Intel’s nose. Still, it retains the bulk of that market and has significant financial resources that competitors do not have, which Gellsinger intends to employ and turn the company around in the 2020s. $20 billion will be spent to develop the largest chip factory ever seen, right outside of Columbus, Ohio (among other projects).
Growth and the Future
Intel is a solid company, but the growth from these capital investments will take about five years to realize, which lower free cash flow for now. It’s unclear how these will materialize into strong financial results. Gellsinger is right to focus on the fundamentals, and there is certainly demand to fill, but a big “What if?” remains. Can these intense expenditures produce growth for a company that is already quite large?
The weakening of the brand is the problem. AMD and Nvidia could continue to grow as well and could offset Intel’s gains over the next decade. Where they lack scale, they have quality and are going to be first in line to satisfy chip demand.
The decline in buybacks is concerning too. While an accounting tactic, it did return value to shareholders.
Valuation
Growth Assumptions: 5% first five years, 9% second five
Intrinsic Value Per Share: $40
While solid, current cash flows don’t justify the price. Nevertheless, if money is going out of Intel and into a place like Ohio, perhaps a regional bank in that vicinity is a good buy. LCNB Corp is one such publicly traded bank.
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