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Intel's Rising Valuation

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February 29, 2012 – Comments (0) | RELATED TICKERS: INTC

Board: Intel Corporation

Author: ULS2

A look at Intel's stock price charts tells me at least two interesting facts: (1) since Sep-2011, INTC's price has been increasing at a significant clip, approaching the highs it set in 2007, before the market began to collapse, (2) this is in marked contrast to the price movement over the last decade or so, when Intel's stock price delivered a performance that only Warren Buffett (and people who think like him) were able to appreciate. I like to offer some possible explanations for this phenomenon, and speculate a bit on the future.

Thought #1: could it be that the market is finally beginning to understand Intel?
This morning I listened to a presentation that Stacy Smith (CFO) gave at a Morgan Stanley conference. He more or less repeated a line of facts that he's been presenting to the public for about a year now, and that deserves repeating, IMHO:

A-Moore's Law can be a great boom to the (few) companies that have learned to exploit it.

B-INTC has been and still is a leader in exploiting ML; it commands a clears lead in SC manufacturing technology, with all the benefits associated with that, and Intel's lead seems self-sustainable for a long time to come.

C-this lead allows INTC to enter into new product ventures (some/most of them new for Intel only), like ultrabooks, smartphones, and tablets.

D-INTC's revenues have grown lately at rates not seen for a long time, for 3 reasons mainly: (1) PCs crossing the affordability threshold (i.e. 8 weeks of avg income) in several emerging market nations, and these EMs are very large in size, (2) INTC has a significant presence in the data center market, two-thirds of which is non-server µPs, where margins are much above average for Intel, (3) new product ventures for INTC (if they become successful) like ultrabooks, smartphones and tablets, can bring significant revenue growth for some time to come (my own guess: 5 to 10 years at least).

For investors, all the above facts and trends have brought about three nice developments: (A) significant top line CAGRs => (B) good profit CAGRs (should be even better than rev CAGR because of scale, but significant investments required for capex and R&D have subtracted from profits past+now; possibly less so in the future) => (C) great dividend CAGRs.

(With a little bit of luck), we can expect these facts + trends to continue into the future for some time to come, which drives thought #2 for me: VALUE INVESTORS have always been looking for companies with good dividend yields and a high probability for the kind of dividend CAGRs that INTC offers for the future, and perhaps some … many of them are beginning to see, that to get what they are looking for requires companies with very strong supporting drivers for factors (A) and (B) above; drivers like (a) through (d) mentioned by Stacy.

Another summary for my thought #2: growth investors have been leaving Intel over the course of the last decade, but now value investors are entering the game. In case everything works out the way Intel plans, thought #3 could come into play as well: some of the growth investors that left Intel may be coming back in addition to all the new value investors.

What do y'all think about my thoughts above?

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