hi i'm jimmy in this video we're looking at
intel ticker symbol INTC our goal with this video is to better
understand the basics of intel's business
look at some of their recent news which hasn't been too good lately
and then try to see if we can come up with a fair value for intel stock
and hopefully we can use this information to help improve our
investment portfolio and get us closer to our goal of
achieving financial freedom okay so let's jump in and see if
intel would make a good addition to our portfolio so this is a chart of intel's
revenue going back to 2014 and as we can see
revenue has done a decent job of drifting higher
and that's at least partially due to the fact that
some of their different segments have seen pretty good growth
specifically over the past two years well in the past two years we saw a jump
in the client computing group their data center group
as well as their internet of things group which
really they just started reporting on back in 2018.
either way these three segments have been some of the main drivers to the
growth of almost two almost 72 billion dollars
in 2019. okay now let's look quickly what
happened on intel's most recent earnings report
which caused intel stock to take a quick nose dive
so here's what intel stock looked like this is a one year chart
and clearly in this area here well this is when the whole stock market fell from
the coronavirus but this most recent drop here well this
is the result of intel's most recent earnings report
so here's what happened first if we were to look at revenue from
the most from the second quarter of 2020 this is
what their numbers came out to be they came out to be about 19.7 billion
dollars in revenue and that was better than the
18 and a half billion or so they were estimated so they beat revenue
estimates and that's a good thing and then when we
look over at the earnings per share side of this
well we can see that intel reported earnings per share of a dollar 23
while estimates had them coming in at about a dollar twelve
so once again they beat on the profit side so if we looked at nothing but
their actual numbers well it might seem that things are going
pretty well for intel but as we know intel stock recently
tanked and the reason for the pullback in their
stock is because on this same announcement it was
actually in the earnings call well intel announced
that they're going to be delaying the release of their seven nanometer
products and this was a big deal because many
investors and even customers have been expecting for that product to
be done sooner than later this isn't their first
pushback with it either this is another delay
and the reason for this delay is operational mistakes now intel hasn't
come straight out and said that they haven't
said exactly why the seven nanometer chips
are being delayed other than it was operational and they were having some
issues with you know there were some failures i
think on different parts of them so obviously this is a problem because
operational stumbling is the last thing you want any company to run into
especially when their competitor amd already has seven nanometer products
out on the market so the fact that they're already out
and intel's pushing theirs off until i believe 2022
well that's going to be a problem now i do want to point out
that some of this between intel and amd is simply marketing position yes amd
has a seven nanometer component out there but from
what i understand their seven nanometer product is about the same densities as
intel's 10 nanometer product and that's the only
difference between seven nanometers or 10 or 14. with
different nanometers well you get different densities you get uh with
lower nanometers you would they would deliver in theory
they'd be more compressed they'd get you deliver
it would cost less power they'd be more energy efficient so
they're supposed to get better and better and better as generations go on
go on but seven nanometers where it used to
mean something technically it means less now now with a
lot of its marketing but still intel doesn't have their 10
nanometer product on the market yet so even if it's the same as
amd7 well amd7 is already on the market so we may ask why is intel struggling so
much well intel's true advantage is also
their weakness so intel generally designs and
manufactures all of their own products so while amd
is outsourcing their manufacturing to taiwan
semiconductor well intel is trying to create their own
so the disadvantage of them creating their own
is exactly what they're going through right now they're going to run into
issues and because of that their stock is going
to struggle but in theory the advantage of
intel doing their own research and designing their own product and then
creating the machines to build them and then creating
their own uh products at the end of the day
is in theory they should end up with better margins and i was curious if this
was in fact true so i went down and pulled up gross
profit margins for both intel and amd and as we could
see intel does in fact lead the way now i do
think it's important to point out that amd's gross profit margins are
improving and we should keep an eye on this over
the coming years because i'm very curious to see if their profit margins
do catch up to intel but either way intel is looking fairly good
from a margin perspective and then when we switch over to net income margins
well here we can see that intel's net income margins are
really what separate the company it's one of the appealing parts
to intel and i think this is a good illustration
of intel's competitive advantage but this brings us back to the same problem
the competitive advantage is only as good as long as intel can
effectively create and manufacture their products
and their seven nanometer product or their
10 animated product coming in a year but after amd is
already out in the market well that's simply not going to cut it
okay now there has been some talk of intel using a third party sort of
like a taiwan semiconductor to help manufacture that and that could
help them get back on track but it's also possible that if they do
that it hurts their competitive advantage
as well and that will probably hurt their margins
so perhaps they do it just temporarily to try to get back on track
and move things along at a slightly faster pace
i've also read that they've moved around some personnel
within these divisions to try to restructure the organization to try to
get a bit more accountability for the higher-ups in the business
so i think at the end of the day this will be a good thing for them
so this brings us to the question is intel a good investment today
well the first question we need to ask ourselves is
do we think that they can clean up their operational issues
if the answer is no well then our answer is
no we shouldn't invest in intel if we don't think they can clean up their
operations let's go look at amd instead that could
be way more interesting but if we think that they can do it then
it might make sense for us to try to come up with a fair value
for intel stock using the updated newly delayed production
numbers and for that we shift over to our
discounted free cash flow calculation now i'm going to not going to walk
through how the formula actually works i did a whole video
on how to do this i create an excel template that's what this is
if you're curious i'll leave a link to that video in the description below
but for now i'll just run through the basics of what we're using here so first
we've got projections for free cash flow that i
found from a few different analyst reports who just averaged them
up we then discount that by a required rate of return of seven
and a half percent we used a perpetual growth rate of 2.5 percent
and basically that rate is how fast do we think
intel can grow free cash flow forever 2.5 percent is about reasonable that's
about the long-term growth of the overall economy we then that
gives us the total company value we take that we divide it by the shares
outstanding and just like that we get a fair value for intel stock
of about 92 dollars per share now sometimes if a company has a ton of debt
it makes sense for us to count to account for that debt
as well and i'm actually not going to do that in this situation
because although intel does have about 38 billion dollars in debt
that's not a ton relative to the 72 billion in revenue they're bringing in
plus they have about 12 billion billion in cash and another
17 billion in short-term investments so i don't think there's really any need to
account for the debt but if you're curious well the fair value would have
come out to be about 88 per share after accounting for debt
technically that's a fair value of the equity so that's probably a cleaner
number to use but let's say we want to take the middle
of that we'll say okay the fair value for intel stock is about ninety dollars
per share right now intel's trading at about fifty
dollars a share so that's about eighty percent upside if these numbers
are anywhere near accurate another advantage of intel
is that they've been consistently paying a dividend for many many years
and there's no reason to think that this is going to stop
right now their dividend yield is just short of three percent
so that could help sweeten the pot a little bit if we are
interested in buying their stock while they clean up their operational
struggles and in the meantime we can collect the
dividend and hopefully over the next few years they fix
a lot of some of their problems or at least some other problems and if the
stock gets anywhere near the estimated fair value that we came up
with well that could be a very good thing for our portfolio
now personally i don't own this one just yet
but this was a very interesting analysis and this might be one of those that i'm
adding in the near future since it looks like
there's some tremendous upside and there's a huge margin
of safety right now if it's really worth ninety dollars a share we bought it now
that's an enormous margin of safety now discounted cash flow isn't the only way
to value a stock in fact in my last video i did i went
through some of the popular ways to value stocks
based on the type of stock it is type of industry it's in things along those
lines so if you're curious if you're looking
for other ways to value stocks besides this
perhaps that could be a good next video for you to watch i'll i got a link right
here i'll leave another link in the description below
and i want to thank you so much for sticking with me all the way to the end
of the video i really appreciate it thank you and
i'll see in the next video