Let's think like businesspeople for a moment. If we owned all the shares in Intel and one day decided to sell the company to a private equity firm or semiconductor company, what price would we expect to get for the company? Would we consider offers matching Intel's current price as low, high, or reasonable?
As of April 26, Intel's stock price is ~$32, and their equity per share, or book value per share, is $26. This means Intel, one of the most important companies in the world, is selling for 1.24x its book value (BV).
(I show the book value calculations in Intel's latest quarterly report. Link to the report below.)
Does anyone really think Intel is worth 1.24x its book value? To put this number into context, let's see the book value of other public companies in the semiconductor industry. I know some of these companies do not compete directly with Intel, but I just want to do a heat check to see if Intel is being put in the right light.
Heat Check
If you sold Intel's entire business today, what multiple would you expect? Would you sell for less than Global Foundries, which only makes lagging edge chips, or would you sell for less than Micron, which is in the commodity memory chip business?
Let's also see how much companies will pay to take entire companies private.
The Tower deal did not close, but it shows the price real buyers will pay for entire companies.
M&A Activity
Should Intel, one of the most important companies in the world, sell for less than Tower Semiconductor?
Analyst Community
According to the Wall Street Journal, 45 analysts cover Intel, and 78% of them have a hold, underweight, or sell rating on the stock. This tells me that the analyst community has turned cold to Intel.
One of my favorite investors is Howard Marks, and in his book, "The Most Important Thing," he mentions the stock market is constantly swinging between "euphoria and depression, between celebrating positive developments and obsessing over negatives, and thus between overpriced and underpriced.”
The pendulum has swung to a negative extreme for Intel. To the point where the numbers don't even make sense. What's interesting about the stock market is that great opportunities often sit in plain sight for months and years, waiting for someone to come and grab them.
Opportunities Small Investors Should Take Advantage Of
The media often say it's hard for small investors to beat the market and "professional" investors, but I don't believe this is true. I think small investors don't know the advantages they have, so they don't play to their strengths.
Small investors will have an advantage if they:
1) Maintain a long-term time horizon.
Most novice and professional investors lack patience, so if they don't believe a stock will go gangbuster within a few quarters, they will shy away from it. My philosophy is that if a stock doubles in 5 years, that's a ~15% return and a successful investment. CD's don't pay 15%. Safe government bonds don't pay 15%. Savings accounts don't pay 15%.
15% is a great return.
"Wealth gained hastily will dwindle,
but whoever gathers little by little will increase it."
Proverbs 13:11 ESV
2) Small investors don't need to compete with the S&P 500.
Trying to beat the S&P 500 every year will lead investors towards having a short-term bias because they will need to make short-term moves in order to beat a short-term metric. I understand money managers need to compete against the market because their clients demand outperformance every second of the day, but for small investors, we can be patient and avoid the stress and danger of hopping on trends that will lead us into deep waters. We can underperform the stock market for 4 years, and if our shares double in year 5, we will have a ~15% return and outperform the stock market's average annual return of 10%.
The Government Has Created a Floor for Intel
If most companies go bankrupt, the government will not care. This is not the case with Intel. The government sees them as an important part of our national security and gave them the most money from the Chips Act to show their support. Some companies in the semiconductor industry benefit from a government put, because their government will not let them fail, especially since countries are trying to increase their chip-making capabilities. I don't have a specific number or formula, but some value should be added to companies that we know have strong government support.
Other Reasons for Intel Being One of the Most Undervalued Companies
I don't believe Intel is undervalued just because of their price to book ratio. Companies can have a low price to book ratio and still be expensive. Intel becomes cheap when you factor in their technical expertise, irreplaceability, customer relationships, government put, position in the world, valuable investments (Mobileye), partnerships, and ability to raise cash.
I know some people obsess over the technical details of every product Intel releases, and they compare the product with AMD and NVIDIA, but this is not the right way to analyze the company. This quarter, NVIDIA might have the best product; next quarter, Intel might be the best; and next quarter, it might be AMD.
The question for Intel should be, are they heading in the right direction, and can they meet most of their goals? Their 3 main goals are:
5 nodes in 4 years.
Become the 2nd leading foundry in the world by 2030.
60% gross margin and 40% operating margin.
The truth is, investors don't need Intel to reach 5 nodes in 4 years, get 60/40% margins, or become the 2nd leading foundry in the world by 2030 for the stock to be successful.
If Intel gets to 5 nodes in 5 years, they get their margins somewhere in the +50/30 range, they are the 3rd leading foundry in the world by 2030, and they show steady profitability, Wall Street will love the company, price targets will increase, media coverage will become positive, the dividend will increase, people will jump on the bandwagon, and their price to book ratio will at least double to GlobalFoundries' 2.4x multiple.
The company does not have a high bar to climb. They already have the assets, people, and government checkbook to be successful. They just need the time. Something most people don't have a desire to give.
As always, feel free to email me to discuss any of the insights I mentioned today.
ov@myinvestmentdreams.com
Stay strong, stay blessed, and God willing, I will see you next week.
The Lord is good to those who wait for him, to the soul who seeks him.
Lamentations 3:25
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