Intel Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Intel Corporation is a global semiconductor giant, designing and manufacturing a wide range of computing and communication products, serving various markets such as PCs, data centers, and embedded systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Analysis: 2/5 Intel’s moat is categorized as a Narrow Moat at 2/5. It’s mostly derived from cost and switching advantages within the x86 architecture (processors). While Intel’s processors have remained a staple in the PC and server markets, its manufacturing issues have undermined their cost competitiveness and allowed competitors like AMD to make significant headway. This, combined with some market shifts, leads us to believe that they currently don’t have the ability to generate returns on capital that are materially above the industry norm, which makes their moat relatively narrow. The moat is also becoming vulnerable due to new competition entering the space, particularly in ARM based chips for datacenter and AI compute.

Details on the sources of competitive advantage or moats:

  1. Process-based cost advantage (partially eroded) : Intel historically benefited from its ability to manufacture chips at a lower cost than its competitors as well as higher quality products. However, recent struggles in process development have created issues. This was evident in their most recent earnings call, they have fallen behind competitors in manufacturing and have higher costs and lower yields.
  2. Switching Cost: Intel’s dominance in x86 architecture creates switching costs. Many systems are built for that specific platform, and porting the same systems to other platforms like ARM will lead to large upfront costs.

Legitimate risks that could harm the moat and the business resilience

  1. Manufacturing Missteps: Failure to get its manufacturing process back on track would be devastating for their profitability and competitive advantage as other competitors are producing better chips at lower prices.
  2. Industry Shifts: The increasing prominence of ARM-based CPUs in new markets like datacenter and AI will erode Intel’s market dominance if they do not come up with a good product for those markets. If the market moves further away from the x86 architecture they will be under severe duress.
  3. Competitive Intensity: Increased competition from competitors like AMD in CPU and Nvidia in AI will continue to erode its market share. These companies have been aggressive, and if Intel fails to compete, it will cause a loss of market share and profitability.
  4. Technology shifts: Rapid changes in technology can make the company’s technology obsolete. If they cannot keep up they will likely lose business. This includes the changing trend of AI acceleration through GPU’s and customized silicon.

Business Overview: Intel is the world’s second-largest semiconductor manufacturer based on revenue. Its business can be broken down into the following categories.

  • Intel Products: This segment focuses on the design and manufacturing of high-performance computing products including CPUs, AI, and networking technologies. It can be further divided into:

    • Client Computing Group (CCG): Designs and manufactures CPUs for notebooks, desktops, and other client computing devices.

    • Data Center and AI (DCAI): Designs and manufactures CPUs and accelerators for data centers, cloud, and AI computing.

    • Network and Edge (NEX): Develops and sells hardware, software and solutions for edge and network infrastructure.

  • Intel Foundry Services (IFS): Provides manufacturing capacity to other chip makers.

Intel generates the vast majority of its revenue from the Intel Products business.

Financial Analysis

  • Revenue Trends: Intel has seen decreased revenue YOY because of a decline in PC sales and overall supply chain issues. The revenue decline is evident in nearly all of their divisions.
  • Margins: Gross margins were roughly stable. But in terms of operating income all the segments are performing quite poorly, with Intel Foundry leading that loss.
  • Capex: They have been investing aggressively, while also generating negative free cash flow.
  • Debt: Intel is a large amount of debt (especially long term debt), due to its aggressive capital investment.

In their most recent earnings call Intel had the following highlights:

  • Q3 2024 Revenue at $14.2 billion. GAAP EPS at $0.07.
  • Operating income of $810 million.
  • Intel Products operating margin of 15.3%, including a decrease of 11.5% in Net Income from the prior year.
  • Intel Foundry had an operating loss of $81 million, compared to a $220 million loss in Q3 2022.

The biggest issues Intel is currently facing is a decrease in market share and performance along with decreasing margins. They need to fix their current manufacturing process, and also increase revenue from higher performing chips in AI and data centers.

Understandability: 3/5 Intel’s business model is reasonably complex, but quite understandable with some effort. Their segments are well defined, and most people would have a general understanding of their products, though, understanding Intel’s technological advantages requires a little more technical knowledge, and their business segments also have their specific nuances. Thus the understandability score is at 3.

Balance Sheet Health: 4/5 Intel’s balance sheet health is at a 4. Their debt level is high due to increased investment in infrastructure, but their current assets cover liabilities. The firm’s strong market presence should translate to further cash flow to help with debt repayment.

Specific concerns: 1.Intel has a large amount of debt and has negative free cash flow. This has been driven by the firms investment in chip manufacturing but also may signal trouble in the future if they do not see a return in profits.

  1. Intel needs to show more progress in the AI space. There is little certainty that they will be able to win against current players like Nvidia. 3.The share price is currently quite volatile, and they have had a large share price decline in the last 2 years, they need to show that they can deliver sustained profits going forward.
  2. Overall their product line is too diverse and doesn’t have any specific strengths in one sector.