First, I love your substack and writing style, having just discovered it! While I more or less agree with you about Intel in the short term, IMO this does not quite account for valuations.
If the "drug company" has already run up it could take a bigger beating in a future cyclical downturn (whatever the reason for it). But if Intel has been beaten down so much that it's down to rock-bottom valuations, then it could do better longer term in a turnaround. Unlike a sick human, sick companies can re-incarnate in many different ways.
So, the question really is what would be the rock-bottom price for Intel? Intel's book value is about 110B. Most of it is fab PPE which is valuable and can easily be sold. Let's say Intel Foundry is a complete failure. I could see its valuable equipment and real estate being sold to TSMC's US operations (which they are ramping) or Samsung which already has long standing US operations. Heck Micron could bid for some things like the fab shells etc. Even the worst fabs have a greater than 1.0 Price/Book valuation. But let's apply a minor discount and say one might realize 100B of that book value.
That leaves the question of how to value the products group. What's the worst case we can imagine for them? Let's say they lose the complete datacenter/NEX business. In reality they will have some percent of on premises x86 server business that will not die but let's be harsh. The client is unlikely to die completely because even with superior products AMD and Apple haven't quite managed more than 25-30% market share. There seems to be some combination of brand value, inertia and/or application/driver compatibility worries at work. Let's say they shrink to a third of their current client CPU revenues. That gives about 10.3B in sales per year. Add about 4.2B in sales per year for MobileEye/Altera and that gives about ~15B in sales per year. The most beaten down value segment of small value gets about a 1.0 price to sales multiple. Large value is typically a higher multiple but again let's be conservative. That gives about 115B in value. Intel is not far away today at 135B market cap. One could do a more detailed analysis by looking at each asset in the balance sheet (perhaps I should do a substack post) but you get the rough idea.
The downside doesn't seem that much. Let's also not forget that the US and western governments have a vested interest in keeping Intel alive as way more strategically important than the car mfrs like GM etc. were ever in the GFC. It's also good for consumers and society to have a viable second leading edge semi foundry. If Intel turns around it will be worth way more. The risk/reward to me looks good if we see the green shoots of a turnaround.
Intel even acknowledging and coming terms to how screwed up they were is a big deal, so points to Pat Gelsinger for that even if the fruits are yet to be seen. Don't underestimate what the right kind of technically competent CEO/management can do to turn around a company. Just see Satya and Microsoft. Of course, it takes a whole lot longer to turn around a huge tanker like a Semiconductor mfr., so I'm willing to give it more time. Let's see ...
P.S. Full disclosure: I own INTC, and none of this is investing advice so readers should do their own due diligence.
#2 Global Foundries sold their two EUV machines at a steep discount to book value. One sent back to ASML with a large "restocking" fee. The other sold to a university for research. https://youtu.be/vUQ6Wizhbpo?si=t2bR5LjbBuGHdT_y
Generally agree with most of your other points. Problem with "the downside doesn't seem that much" is there are so many other semi companies that are better buy+holds. Opportunity cost.
Gelsinger is great. He is the only leader who can save intel and the strategy is good. Problem is the blob has proven resilient. A lot more middle management needs to be fired. Meteor Lake is very underwhelming and there is a lot of suspicious stuff like the underclocked ring bus. I suspect factions within Intel lied to each other and hid the truth, upper management found out last minute, and thus Meteor Lake got a weird paper launch in December with seriously underwhelming performance and battery life. Definitely not a Centrino moment...
I am planning to write an entertaining history of Intel titled "Gelsinger's Odyssey" around this summer. Have a lot of drafts half-finished.
P.S. I was going to buy INTC 34p options right before earnings but forgot. Very busy with dayjob. Was an easy 2.5X overnight but oh well.
Thanks for the response. I'd be curious to read what your worst-case valuation might be. There is the risk of the opportunity cost for sure. That's the price to pay for the potential upside. But I guess what I want to say is that this risk IMO is not as correlated to the risk of an AI driven Semi "growth" bubble leading to a bust. In the highly cyclical Semi industry, it could be deep and/or drawn out. I don't mind holding some "value" type turnaround stocks in that scenario.
Agreed about Meteor Lake. Pat was probably not involved when it was started but yeah it would have been better if he had caught the problems earlier, under-promised and over delivered. They'd better deliver the goods in the next 12 months.
First, I love your substack and writing style, having just discovered it! While I more or less agree with you about Intel in the short term, IMO this does not quite account for valuations.
If the "drug company" has already run up it could take a bigger beating in a future cyclical downturn (whatever the reason for it). But if Intel has been beaten down so much that it's down to rock-bottom valuations, then it could do better longer term in a turnaround. Unlike a sick human, sick companies can re-incarnate in many different ways.
So, the question really is what would be the rock-bottom price for Intel? Intel's book value is about 110B. Most of it is fab PPE which is valuable and can easily be sold. Let's say Intel Foundry is a complete failure. I could see its valuable equipment and real estate being sold to TSMC's US operations (which they are ramping) or Samsung which already has long standing US operations. Heck Micron could bid for some things like the fab shells etc. Even the worst fabs have a greater than 1.0 Price/Book valuation. But let's apply a minor discount and say one might realize 100B of that book value.
That leaves the question of how to value the products group. What's the worst case we can imagine for them? Let's say they lose the complete datacenter/NEX business. In reality they will have some percent of on premises x86 server business that will not die but let's be harsh. The client is unlikely to die completely because even with superior products AMD and Apple haven't quite managed more than 25-30% market share. There seems to be some combination of brand value, inertia and/or application/driver compatibility worries at work. Let's say they shrink to a third of their current client CPU revenues. That gives about 10.3B in sales per year. Add about 4.2B in sales per year for MobileEye/Altera and that gives about ~15B in sales per year. The most beaten down value segment of small value gets about a 1.0 price to sales multiple. Large value is typically a higher multiple but again let's be conservative. That gives about 115B in value. Intel is not far away today at 135B market cap. One could do a more detailed analysis by looking at each asset in the balance sheet (perhaps I should do a substack post) but you get the rough idea.
The downside doesn't seem that much. Let's also not forget that the US and western governments have a vested interest in keeping Intel alive as way more strategically important than the car mfrs like GM etc. were ever in the GFC. It's also good for consumers and society to have a viable second leading edge semi foundry. If Intel turns around it will be worth way more. The risk/reward to me looks good if we see the green shoots of a turnaround.
Intel even acknowledging and coming terms to how screwed up they were is a big deal, so points to Pat Gelsinger for that even if the fruits are yet to be seen. Don't underestimate what the right kind of technically competent CEO/management can do to turn around a company. Just see Satya and Microsoft. Of course, it takes a whole lot longer to turn around a huge tanker like a Semiconductor mfr., so I'm willing to give it more time. Let's see ...
P.S. Full disclosure: I own INTC, and none of this is investing advice so readers should do their own due diligence.
Glad you enjoy the content. Appreciate the detailed comment.
Fabs and semicap equipment are not easily sold at book value. Here are two (rare) examples.
#1 Micron selling the Lehi Utah 3DxPoint fab to Texas instruments. This was at a significant loss because TI had to re-tool the fab or analog. https://www.micron.com/about/blog/company/partners/sale-of-lehi-fab
#2 Global Foundries sold their two EUV machines at a steep discount to book value. One sent back to ASML with a large "restocking" fee. The other sold to a university for research. https://youtu.be/vUQ6Wizhbpo?si=t2bR5LjbBuGHdT_y
Generally agree with most of your other points. Problem with "the downside doesn't seem that much" is there are so many other semi companies that are better buy+holds. Opportunity cost.
Gelsinger is great. He is the only leader who can save intel and the strategy is good. Problem is the blob has proven resilient. A lot more middle management needs to be fired. Meteor Lake is very underwhelming and there is a lot of suspicious stuff like the underclocked ring bus. I suspect factions within Intel lied to each other and hid the truth, upper management found out last minute, and thus Meteor Lake got a weird paper launch in December with seriously underwhelming performance and battery life. Definitely not a Centrino moment...
I am planning to write an entertaining history of Intel titled "Gelsinger's Odyssey" around this summer. Have a lot of drafts half-finished.
P.S. I was going to buy INTC 34p options right before earnings but forgot. Very busy with dayjob. Was an easy 2.5X overnight but oh well.
Thanks for the response. I'd be curious to read what your worst-case valuation might be. There is the risk of the opportunity cost for sure. That's the price to pay for the potential upside. But I guess what I want to say is that this risk IMO is not as correlated to the risk of an AI driven Semi "growth" bubble leading to a bust. In the highly cyclical Semi industry, it could be deep and/or drawn out. I don't mind holding some "value" type turnaround stocks in that scenario.
Agreed about Meteor Lake. Pat was probably not involved when it was started but yeah it would have been better if he had caught the problems earlier, under-promised and over delivered. They'd better deliver the goods in the next 12 months.
Looking forward to "Gelsinger's Odyssey"!