Intel Corporation (INTC)

YFAC 2021 BUY CALL

27 August 2021

Analysts We are initiating coverage of Intel Corporation, (“INTC” or

Kasikrit Chantharuang “Company”) with a BUY rating in the long term.
Jarold Ong Chu Chin
Sivakumar Aadithya Competitive Forces Model
Nguyen My Binh An • Extremely Low Threat of Potential Entrants
• Low Threat of Substitutes Goods/Services
Basic Information of 27 August 2021 • Moderate Bargaining Power of Buyers and Suppliers
Last Closed Price: US$53.89 • High Power of Complementary Goods/Services Providers
Bloomberg Ticker: INTC • High Intensity of Industry Rivalry
GISC Sector: Information Technology
GISC Sub-Industry: Semiconductors &
Semiconductors
Investment Thesis
Equipment • Accelerated Expansion of Fabrication Business allows
1 Year Price VS Relative Index Intel to increase in revenue growth in the long term.
30%
• Huge Growth Potential for IOTG Segment driven by
20%
increased EV sales trend in 3 major regions helps Intel to
10% possibly ride the technological trend and boost its
0%
earnings.

-10%
• A Strong Financial Position and Effective Recovery Plan
-20% sets Intel up in a position to catch up with its peer swiftly.
Company Description
Intel Corporation (INTC) is the world’s largest Investment Catalysts
semiconductor company by revenue. Intel • Governmental Support driven by Geopolitical Tensions
designs, manufactures, and sells will boost Intel’s standings significantly among its
microprocessors for computer system competitors.
manufacturers and offers non-platform or
adjacent products comprising accelerators, • Continual Demand Growth in the PC Market driven by
boards and systems, connectivity products, the continuation of lockdowns and shift of human
and memory and storage products. behaviour around the world will continue to increase
Intel’s Client Computing Group (CCG) sales.
Key Financials
Market Cap US$218.84B Valuations
52-Week High-Low US$43.61 - 68.49 We believe that INTC’s stock is currently undervalued which is
determined through the method of Relative Valuation using
(US$b) 2Q2019 2Q2020 2Q2021 numerous valuation multiples such as P/BV and EV/EBITDA.
Revenue 16.5 19.7 19.6
Gr Rate (%) (2.7%) 18.9% (0.5%) Market Risks
EBIT 28.0 28.9 28.3 • Geopolitical Tensions between the US and China
Margin (%) • Investors’ Increasing Sentimental Adherence to Social
ROE (%) 26.8 30.5 23.2 Responsibility
ROA (%) 15.3 16.6 12.3
Key Personnel
Patrick Gelsinger Chief Executive Officer
Greg Lavender Chief Technology Officer
Raja M. Konduri Senior Vice President &
General manager

INTC Buy Call | Page 1

 Company Overview
Figure 1: Revenue per Segment (2Q2021) Intel Corporation (INTC) is the world’s largest semiconductor
MBLY PSG Others company by revenue based in California, the United States of
2.6% 0.9%
IOTG 1.8% America. Intel designs, manufactures, and sells microprocessors
5.3%
for computer system manufacturers and offers non-platform or
adjacent products comprising accelerators, boards and systems,
CCG
connectivity products, and memory and storage products.
2Q21 54.5%

Revenue
Its revenue comes from five main segments:
DCG of $18.5B
34.8%
Computer Client Group (CCG)

CCG, which takes up around 55% of Intel’s revenue, emphasises

on platforms designed for notebooks, 2-in-1 systems, desktops,
tablets, and smartphones. It also includes wired and wireless
Source: Intel’s 10-Q connectivity products and mobile communication components.

Data Centre Group (DCG)

Figure 2: Revenue Growth by Year DCG, which takes up around 35% of Intel’s revenue, focuses on
$90,000 building workload-optimized computing, storage, and network
$80,000
$70,000
systems. Cloud service providers, corporate and government, and
$60,000 communications service providers are sub-sections among the
$50,000 DCG segment.
$40,000
$30,000
$20,000
Internet of Things Group (IOTG)
$10,000
$0
2016 2017 2018 2019 2020
IOTG, which takes up around 5% of Intel’s revenue, focuses on
developing high-performance compute for targeted verticals and
Source: Company Reports embedded markets. IOTG customers include retailers,
manufacturers, healthcare providers, energy companies,
automakers, and governments.

Figure 3: Revenue by Top 3 Regions Mobileye (MBLY)

22

20
MBLY, which takes up around 2% of Intel’s revenue, develops self-
driving cars and advanced driver-assistance systems (“ADAS”).
18 The product utilizes a wide range of technology from computer
vision to machine learning and data analysis.
16

14 Programmable Solutions Group (PSG)

12
2016 2017 2018 2019 2020 PSG, which takes up around 3% of Intel’s revenue, manufactures
programmable semiconductors, mainly FPGAs and structured
ASICs, as well as associated products, for a variety of markets,
Source: Company Reports
including communications, data center, industrial, and military.
PSG's product line includes FPGA accelerators that work in
conjunction with Intel microprocessors.

INTC Buy Call | Page 2

 Competitive Forces Model
Figure 4: Competitive Forces Model We have condensed the company overview and industry overview
Competitive Rivalry
into a Competitive Forces Model diagram. As such, we can
conclude the following: competition within the industry is high
due to constant technological need for R&D; threat of new
Power of Threats of New
entrants is extremely low due to high economies of scale;
Complements Entrants bargaining power of consumers and suppliers are moderate since
competitors’ products are marketed differently but Intel deals
with only a few suppliers; threat of substitutes is moderately low
due to high switching costs and differentiated products; and
Threats of Consumers' and power of complements are moderately high since motherboards
Substitutes Suppliers' Power
are required to work with semiconductor CPU chips.
Source: Our Analysts’ Estimates
Intensity of Industry Rivalry - High

Intel faces fierce competition in the data-centric, PC-centric,

memory, programmable semiconductor markets. In the data-
centric market, AMD's Xilinx deal and NVIDIA's ARM deal show
both companies' intention to compete with Intel’s Data Centre
Figure 5: Intel’s DCG Revenue (US$b) Group (DCG), manifesting a 9% slump in DCG revenue YoY.
Furthermore, Google and Twitter are now using EPYC Rome
7.1
9%
dow
processors which demonstrates AMD’s competitiveness. Intel also
n Yo
Y
6.5
faces competition from ARM-based architecture. Several cloud
providers, including the world's largest - AWS, are using Arm-
based chips in their data centres. However, Intel can expect to
hold a significant data-centric market share as changing
instruction sets is resource-intensive. Windows Server for one is
still straightjacket on X86 platforms, leading to 6% revenue
2Q2020 2Q2021
growth of Computer Client Group (CCG) YoY.
Source: Intel’s 10-K
The semiconductor, IOTG, AI, ML and especially self-driving car
industries are expected to have strong continuous year on year
growth for the next few years. Intel has forecasted a data-centric
and PC-centric Total Addressable Market of approximately 230
billion and 70 billion respectively by 2024. Positive industry
growth means that competitors are likely to engage in
Figure 6: Intel’s CCG Revenue (US$b) competitive actions as they would want to capture the maximum
gains.
10.1
In addition, the semiconductor industry requires consistent R&D
YoY
9.5 6% up otherwise a firm will be overtaken by another due to superior
performance.

Intel currently produces more x86 processors than any other

company, producing one million dies per day. Given other chip
manufacturers’ constrained capacities, it would be unfeasible for
2Q2020 2Q2021 the industry to digest Intel's incredible sales volume. That means
that the industry depends largely on Intel. Hence, Intel will
Source: Intel’s 10-K
continue being a juggernaut in chip fabrication and rivals will have
a hard time chipping away its market share in the short term so
the rival intensity is a moderate force.

INTC Buy Call | Page 3

 Threat of Potential Entrants – Extremely Low

In the semiconductor industry, its large incumbents take

advantage of extensive economies of scale, which help them reap
immense cost savings which prevent new, smaller entrants from
Figure 7: Cost of building a semiconductor coming into the market.
fabrication plant over the years
The high switching costs further limits the intensity of this threat
Year Cost (US$b) because it takes a long time and is difficult for Original Equipment
2004 2-3 Manufacturers (OEMs) to implement changes in their designs to
their supply chain.
2011 3-4
2020 7-20 The fixed costs are high within the industries in which Intel
operates. For example, ASML's microprocessor fabrication
Source: McKinsey
machines cost $160 million and leading-edge factories might have
20 or more. So, the fixed cost for just fabrication units is 3.2 billion
dollars at least which present a huge barrier to entry. In particular,
Intel’s 2 new chip plants cost 20 billion dollars.

The CPU industry has extensive regulation when it comes to

patents and IP Qualification laws. New competitors would have to
design a CPU using new architecture from the ground-up, a new
Figure 8: Design Cost of Semiconductor Chips
motherboard for it and all while sufficiently differentiating
(US$m)
themselves from AMD and Intel so fixed costs of R&D will be
600 542.2
exorbitantly high.
500

400 CPU manufacturing is a very delicate task that requires specialised

300
297.8
technical experience that can only be accumulated from a
200
174.4 decade’s worth of experience in the CPU industry. New entrants
70.3
106.3 will also have to contend with AMD and Intel’s vast internal
100
economies of scale that allow them to undercut any new entrant.
0
22nm 16nm 10nm 7nm 5nm
Furthermore, Intel’s war chest of 90,000 patents worldwide and a
Source: IBS track record of explosive innovation that decrease both ability and
confidence of new entrants to enter the market. An example of
such a patent is the high-voltage switch with an integrated well
region.

Bargaining Power of Buyers and Suppliers - Moderate

ASML manufactures photolithography systems that are essential

for the semiconductor industry's expansion and progress as
chipmakers require smaller and smaller transistors on their chips.
ASML has a 100% market share in EUV and 88% in DUV
Lithography markets. Combined with a large number of
customers, the limited supply of and heavy reliance on
photolithography machines allow ASML to command high
bargaining power.

Most other products industry suppliers provide are fairly

standardised and have low switching costs. Furthermore, there is
a higher proportion of suppliers to players in the industry.
Suppliers have limited ability to mark up the price of factor inputs
so the bargaining power of suppliers is a moderate force.

INTC Buy Call | Page 4

 There is a much higher proportion of consumers as to producers
in the multiple industries Intel operates in. This means that buyers
have fewer firms to choose from, and therefore, do not have
much control over prices.

The product differentiation within the PC CPU market is high.

However, this is mainly due to firms' marketing strategies which
create a significant perceived difference despite relatively similar
specifications such as transistor size, number of cores and clock
speed. Buyers are hesitant to find alternative firms producing a
particular product. This perceived switching makes the bargaining
power of buyers a moderate force within the industry.

The quality of the products is important to the buyers, and these

buyers make frequent purchases. This is especially true for gaming
enthusiasts and those who require Intel’s services and products
for enterprise and work. This means that the buyers in the
industry are less price sensitive. This makes the bargaining power
of buyers a weaker force within the industry.

Threat of Substitute Goods/Services - Low

In the PC-centric market for CPUs, switching costs for consumers

can be said to be very high. Consumers have to purchase a new
Figure 9: Worldwide CPU Market Share motherboard if they wish to switch to a CPU from a competing
90 brand on a desktop, which costs upwards of hundreds of dollars.
80
70
On the other hand, laptop users would have to buy entirely new
60 laptops that can cost up to thousands of dollars. This makes
50
40
switching costs for most consumers unfeasible, instead opting to
30 upgrade to a better lineup of CPUs from Intel, which can be
20
10
advantageous for Intel since it can retain its customer base and
0 make extra revenue at the same time. However, this may also be
detrimental for AMD and Apple customers looking to switch to
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
1Q2016
3Q2016
1Q2017
3Q2017
1Q2018
3Q2018
1Q2019
3Q2019
1Q2020
3Q2020
1Q2021

Intel CPUs, which could affect Intel’s ability to capture market

Source: Statista share from AMD.

Consumers also purchase CPUs based on their performance and

attributes. Generally speaking, Intel CPUs have higher
performance, whereas AMD CPUs are more power-efficient than
Intel. Overall, AMD CPUs of a similar performance level to Intel’s
tend to cost lower, as a result, the market values AMD CPUs to
have a better performance per dollar ratio. Therefore,
competition may tend towards AMD for budget and mid-range
CPUs, which are the more popular lines of CPUs. Ultimately, the
threat of substitutes is moderately low as Intel has a notable
difference from its competitors and that Intel still has the majority
of the market share.

Power of Complementary Goods/Services Providers -

High

In the CPU market, a close complementary good would be the

motherboards required to house the CPUs. AMD and Intel CPUs
require different motherboards to operate on. As a result, the
price of motherboards can affect the demand for CPUs to a limited

INTC Buy Call | Page 5

 extent since it’s a close complementary good. Intel does not
produce their motherboards nor do they have significant
partnerships, such as cost-sharing agreements with affiliated
Figure 10: Passmark CPU Test, Single-Threaded manufacturers, meaning they have little direct control of the
4000 prices and quality of proprietary motherboards, The market may
3500 opt more towards AMD CPUs if the price and quality of Intel
3000
motherboards are unsatisfactory, resulting in Intel losing market
2500
share due to the shortcomings of complementary providers.
2000
Consumers looking to change CPU brands extensively consider the
1500
features and performance of the proprietary motherboards as
1000
they can affect a CPU’s performance and power consumption to a
500
large extent. Motherboards that have more attractive features
0
such as better optimisation and performance for dollar ratio may
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
affect the final performance of CPUs even if the CPU itself does
Source: ARS Technica not have any significant differences in characteristics, which can
heavily influence consumer preferences to a large extent. Hence
in the CPU market, motherboard manufacturers have significant
power in affecting the final demand and market share for Intel
CPUs.

INTC Buy Call | Page 6

Key Personnel
Patrick Gelsinger is Chief Executive Officer (CEO) of Intel and
member of the board of directors of Intel Corporation, where he had
spent the first 30 years of his career.

Gelsinger began his career in 1979 at Intel right after his high school.
He was the architect of the 80286 processor and 80386 processor, a
product that saved the company back then. At the age of 25, Gelsinger
was given the reins of the 80486 project. Gelsinger went on to
become Intel’s first chief technology officer, and also served as senior
vice president and the general manager of the Digital Enterprise
Group. He managed the creation of key industry technologies such as
USB and Wi-Fi, led 14 microprocessor programs and played key roles
in the Intel Core and Intel Xeon processor families, leading to Intel
becoming the preeminent microprocessor supplier.

With more than 30-year experience working for Intel, under Gelsinger’s leadership, the company has made strong
progress on its 7nm process technology. Gelsinger promised to help tackle the company’s manufacturing issues and
fight against growing competition from AMD, and he will push Intel to become the leader in chip manufacturing once
again.
_______________________________________________________________________________________________

Greg Lavender is senior vice president, chief technology officer (CTO)

and general manager of the Software and Advanced Technology Group
(SATG) at Intel Corporation who joined Intel in June 2021.

As CTO, he is responsible for driving Intel’s future technical innovation and

research programs. He is also responsible for defining a singular artificial
intelligence software stack to support Intel’s range of business and
hardware offerings. Greg will also be responsible for rapidly pulling
together a singular AI software stack to support our range of business and
hardware offerings. He will work collaboratively with software engineering
leaders across the company to evaluate additional organizational
alignments that will enable the best outcomes. He also sharpens the focus
and execution, accelerates innovation, and unleash the deep well of talent across the company.

_______________________________________________________________________________________________

Raja M. Koduri is senior vice president and general manager of the

Accelerated Computing Systems and Graphics (AXG) Group at Intel
Corporation. He leads a business unit chartered with delivering high-
performance computing and graphics solutions for integrated and
discrete segments across client, enterprise and data centre.

Koduri has shouldered several critical roles for Intel over the past few
years. Koduri drove Intel’s long-term architecture strategy. He also led
the creation and execution of Xe, oneAPI, and several other key hardware
and software technologies critical to high-performance computing and
graphics.

Koduri has devoted his career to advancing visual and accelerated computing across a range of platforms, including
PCs, game consoles, professional workstations and consumer devices. Koduri is an innovator in GPU computing
technology.

INTC Buy Call | Page 7

Financial Statements
Income Statement

(In Million Dollars) Six Month Ended

29 Jun, 2019 27 Jun, 2020 26 Jun, 2021
Net revenue 32,566 39,556 39,304
Cost of sales incl. depreciation & amortization 13,599 17,033 17,244
Gross income 18,967 22,523 22,060

Research and development 6,770 6,629 7,338

Marketing, general, and administrative 3,222 2,988 2,927
Restructuring and other changes 184 171 2,555
Operating expenses 10,176 9,788 12,820

Operating income 8,791 12,735 9,240

Gains (losses) on equity investments, net 604 156 663

Interest and other, net (124) (342) (252)
Pretax income 9,271 12,549 9,651
Provision for taxes 1,118 1,783 1,229
Net income 8,153 10,766 8,422

INTC Buy Call | Page 8

Balance Sheet
(In Million Dollars) 28 Dec, 2019 26 Dec, 2020 26 Jun, 2021
Assets
Current assets
Cash and cash equivalents 4,194 5,865 4,746
Short-term investments 1,082 2,292 3,014
Trading assets 7,847 15,738 17,097
Accounts receivable 7,659 6,782 7,460
Inventories 8,744 8,427 8,817
Assets held for sale - 5,400 5,817
Other current assets 1,713 2,745 2,421
Total current assets 31,239 47,249 49,372

Property, Plant & Equipment 55,386 56,584 58,166

Equity investments 3,967 5,152 5,655
Other long-term investments 3,276 2,192 1,262
Goodwill 26,276 26,971 26,768
Identified intangible assets, net 10,827 9,026 8,018
Other long-term assets 5,553 5,917 5,356
Total assets 136,524 153,091 154,597

Liabilities, temporary equity, and stockholders' equity

Current liabilities
Short-term debt 3,693 2,504 3,695
Accounts payable 4,128 5,581 5,917
Accrued compensation and benefits 3,853 3,999 3,176
Other accrued liabilities 10,636 12,670 12,048
Total current liabilities 22,310 24,754 24,836

Debt 25,308 33,897 31,714

Contract liabilities 1,368 1,367 68
Income taxes payable 4,919 4,578 4,172
Deferred income taxes 2,044 3,843 3,271
Other long-term liabilities 2,916 3,614 5,329
Total liabilities 58,865 72,053 69,390

Temporary equity 155 - -

Stockholder's equity:
Preferred stock - - -
Common stock 25,261 25,556 26,655
Accumulated other comprehensive income (loss) (1,280) (751) (1,095)
Retained earnings 53,523 56,233 59,647
Total stockholders' equity 77,504 81,038 85,207
Total liabilities, temporary equity, and stockholders' equity 136,524 153,091 154,597

INTC Buy Call | Page 9

Cashflow Statement
(In Million Dollars) Six Month Ended
29 Jun, 2019 27 Jun, 2020 26 Jun, 2021
Cash and cash equivalents, beginning of period 3,019 4,914 5,865

Cash flows provided by (used for) operating activities:

Net Income 8,153 10,766 8,422
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 4,379 5,248 4,862
Share-based compensation 859 941 1,044
Amortization of intangibles 800 865 897
(Gains) losses on equity investments, net (100) (92) (555)
Changes in assets and liabilities:
Accounts receivable 490 224 678)
Inventories (1,443) (271) (126)
Accounts payable 431 208 425
Prepaid supply agreements (444) (161) (1,571)
Income taxes (15) 1,203 114
Other assets and liabilities (564) (1,616) 1,460
Total adjustments 4,393 6,549 5,872
Net cash provided by operating activities 12,546 17,315 14,294

Cash flows provided by investing activities:

Additions to property, plant and equipment (6,875) (6,676) (7,574)
Additions to held for sale NAND property, plant and equipment - - (682)
Purchases of available-for-sale debt investments (1,721) (4,558) (2,000)
Maturities and sales of available-for-sale debt investments 2,031 1,303 2,126
Purchases of trading assets (4,498) (11,429) (14,637)
Maturities and sales of trading assets 3,808 7,430 12,936
Other investing 1,245 (416) 380
Net cash used for investing activities (6,010) (14,346) (9,451)

Cash flows provided by (used for) financing activities:

Increase (decrease) in short-term debt, net 996 - -
Issuance of long-term debt, net of issuance costs 601 10,247 -
Repayment of debt and debt conversion (1,033) (2,775) (500)
Proceeds from sales of common stock through employee equity 305 512 589
incentive plans
Repurchase of common stock (5,579) (4,229) (2,415)
Payment of dividends to stockholders (2,828) (2,811) (2,821)
Other financing 850 629 (815)
Net cash provided by (used for) financing activities (6,688) 1,573 (5,962)

Net increase (decrease) in cash and cash equivalents (152) 4,542 (1,119)

Cash and cash equivalents, end of period 2,867 8,736 4,746

INTC Buy Call | Page 10

 Investment Thesis
Thesis 1: Accelerated Expansion of Fabrication
Figure 11: Foundry Market Size (US$b) Business
120

CAGR
In 2021, Intel has decided to invest $20 billion dollars in Arizona
100
(20 - 25) and $3.5 billion dollars in New Mexico for their fab expansion.
Moreover, Intel is seeing to set up Intel Foundry Services (IFS)
which would position itself to be competing with the likes of TSMC
80
~ 5%
Lagging
60 edge in the long run. Foundry represents a nearly $100 billion
28nm and
above
addressable market by 2025, with most of the projected growth
40
coming from leading-edge computing. This should help Intel to
~ 15%
20
16 / 14
/ 12 nm
Leading
edge
increase their earnings to the far upcoming years.
nm
10 / 7
5nm 3nm
0
2018 2019 2020 2021 2022 2023 2024 2025 In addition, Intel is appeared to be having talks to acquire Global
Foundries which semiconductor research site TrendForce
Source: Intel estimates that it holds a 7% share of the foundry market.

As such, Intel is doubling down on its main advantage over its

competitors like AMD which is that they are one of the few
semiconductor designers that manufacture their own chips. The
Figure 12: Mobileye Revenue (US$m) majority of its rivals like AMD are chipmakers who rely on TSMC
400 377
to manufacture the semiconductors they design. This decreases
owth 327 reliance on third parties and that Intel can process new innovation
350 % Gr
+80.4 without fears of external factors that would affect its production
300

250 209
line as seen during the 2020-2021 chip shortages by TSMC.
200
150 Its production difficulties with the 10nm processors have also
100 seen positive signs as during the second-quarter earnings call, the
50
company stated that over 50 million Tiger Lake processors have
0
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 been shipped. Intel also estimates to ship several million Alder
Lake processors late this year.
Source: Company Reports

Thesis 2: Huge Growth Potential for IOT Segment

As Intel manufactures microcontrollers for Electric Vehicles and

has been developing autonomous driving systems with Mobileye,
Figure 13: Global Plug-In Vehicle Sales (US$m) an Intel company, Intel is setting itself up to reap the benefits of
7000 the trend of automation in the 2020’s.
6000

5000
+54.9% CAGR
The global Advanced Driver-Assistance Systems (“ADAS”) Market
4000 size is projected to expand from USD 27.0 billion in 2020 to USD
3000 83.0 billion by 2030, at a CAGR of 11.9% according to Markets and
2000 Markets. Moreover, the global plug-in vehicles sales have
1000
expanded very quickly at 54.9% CAGR.
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F
The Mobileye Revenue has also soared by 80.4% in the past 2
Source: EV Volumes years. We foresee that the opportunity for Intel’s earnings to
expand from this segment is humungous.

INTC Buy Call | Page 11

 Thesis 3: A Strong Financial Position and Effective
Recovery Plan
Figure 14: A Comparison of Financials of Intel Examples of comparable companies to Intel are Advanced Micro
to its Peers (US$) Devices, Inc. (“AMD”) and NVIDIA Corporation (“NVIDIA”) as they
are in the same industry of semiconductor.
Name Intel AMD NVIDIA
M. Cap 214.9B 129.1B 537.9B
EV 221.6B 123.8B 513.5B Intel is an established large company with a super healthy
Revenue 77.61B 13.3B 21.9B cashflow and a high net income when comparing to its peers. In
EBITDA 34.65B 2.9 B 8.49 B terms of revenue, Intel has around 6 times of AMD and 3.5 times
Net Income 18.56B 3.44B 7.08B of NVIDIA.
Cash Flow 32.36B 2.74B 7.9B
This provides Intel with a safety cushion to the unexpected risks
Source: Market Watch such as political uncertainties and the COVID-19 pandemic.
Moreover, Intel is also able to use its robust cashflow to
continuously make investments in segments where it deems
profitable such as fabrication expansion and the IOTG segment
where the projected CAGR is lucrative in the long run.

With the new structuring of the management team, Pat Gelsinger,

the new CEO of Intel, had announced Intel’s new roadmap to
catch TSMC and Samsung technologically by 2024 and retake the
technical lead by 2025. This would make Intel return to its
competitive track where it was lagging behind due to
manufacturing issues in the past few years.

An action that the new management team has made is to rebrand

its products line for greater market appeal. For instance, it is
renaming its 10nm chips to “Intel 7”. From a technological
standpoint, Intel's 10nm chips are actually on par with “7nm”
labeled hardware from competitors such as TSMC or Samsung,
since they use similar manufacturing processes and provide
comparable transistor density. That applies to commercial
hardware as well: Intel's current 10nm processors are still
competitive with AMD's cutting-edge 7nm Ryzen chips, as we've
seen.

Hence, we believe that the new management plans and strategies

laid out by the new executives will help Intel to turn around and
catch up with its peers swiftly which would in turn increase their
market share and earnings accordingly.

Investment Catalysts
Catalyst 1: Governmental Support driven by
Geopolitical Tensions

Rising tensions between the U.S. and China cause the US to

approve the Innovation and Competition Act which would provide
52 billion dollars of subsidies to the US semiconductor industry.
This would undeniably benefit Intel as the biggest semiconductor
producer in terms of revenue. Furthermore, the company has
INTC Buy Call | Page 12
 reported to establish a deal with the U.S. Department of Defense
to build a domestic commercial foundry infrastructure which
would boost its earnings.

The concerns of national security could also play into Intel’s hands
as trade wars may continue and the outsourcing of semiconductor
manufacturing to TSMC may be affected.

Figure 15: PC unit shipments worldwide (in Catalyst 2: Continual Demand Growth in the PC
US$m) Market
600
CAGR
+4.8%
500 Since the breakout of COVID-19, many have been working from
400
home and, although some may choose to return to offices, we
foresee that the trend of working from home will continue to rise
300
in the coming years since people have become used to the habit
200
that they have experienced since lockdowns. As people’s demand
100 for PC’s will carry on to rise, this will help to boost Intel’s CCG
0 revenue despite Intel’s focus shifting to DCG.
2019 2020 2021F 2022F 2025F

Source: Statista
Valuations
Examples of comparable companies to Intel are Advanced Micro
Figure 16: A Comparison of Valuation Multiples Devices, Inc. (“AMD”) and NVIDIA Corporation (“NVIDIA”) as they
of INTC to its Peers are in the same industry of semiconductor.
INTC AMD NVDA
M. Cap 218.75B 133.56B 507.52B The valuation metrics most appropriate for comparing companies
(US$) in the semiconductor industry are Price/Book Value (P/BV) and
P/BV 2.57 18.90 27.03 Enterprise Value/Earnings Before Interest, Tax, Depreciation, and
Amortisation (EV/EBITDA) as there can be significant earnings
P/S 2.82 10.18 25.84
fluctuation in this sector. We will avoid commonly used metrics
P/CF 6.32 79.91 80.54
like Price/Earnings and Free Cash Flow since they fail to account
EV/ 6.05 76.79 88.00
for several key nuances in semiconductor companies’ valuations
EBITDA
such as abnormally high financing costs, high depreciation
EV/ 2.95 9.89 25.53
expense, and special tax incentives which can cause earnings and
Revenue free cash flow to fluctuate year to year for different companies.
Source: Yahoo Finance
INTC’s current P/BV of 2.95 is substantially lower than its peers –
AMD at 9.89 and NVDA at 25.53. This is due to concerns about the
Figure 17: TTM P/E Band of INTC Stock company’s manufacturing delay in the past few years. Intel’s first
120
7nm chip, meant for personal computers, will not arrive until late
Price @ PE +2SD
100
2022 or early 2023. Its first 7nm data center processor will not ship
80
Price @ PE +1SD
until the first half of 2023. In recent years, Intel has relied on
Price @ Mean PE booming growth in data centers that power cloud computing as
60
Price PC sales generally declined, though both segments have grown as
40 Price @ PE - 1SD
the pandemic prompted greater technology expenditure to
Price @ PE - 2SD
facilitate working from home. As such, INTC stock has been
20
relatively inexpensive to its peers.
0
8/18/16 12/31/17 5/15/19 9/26/20
Moreover, when comparing its own TTM P/E from the past five
Source: Company Reports years, the average P/E ratio is 14.28 and the Standard Deviation is
3.85. INTC’s current stock price of $53.89 is trading at a P/E ratio
of 11.98 which is 16.1% less than its average.

INTC Buy Call | Page 13

 We believe that the market is overreacting to short-term issues is
currently while overlooking the future potential of the company.
With the new leadership team led by Pat Gelsinger as the new CEO
and the outlined reasons, we believe that the company will be
able to turn around and retake the lead of the industry.

As such, we believe that INTC is undervalued and is presenting a

massively lucrative opportunity to buy at the current price of
$53.89.

Market Risks
Geopolitical Tensions between the US and China

Intel fuels global digitalisation efforts by providing the necessary

Figure 18: Revenue by Region infrastructures such as server racks, programmable
90 semiconductors and non-volatile memory solutions. The ongoing
80
trade war has stunted global digitalisation efforts which impacts
70
60
the ecosystem Intel has fostered and depends on to drive up their
50 demand.
40
30 Intel produces raw chips at wafer fabrication plants. From there,
20
10
chips go to assembly and test facilities. Afterwhich, they are sold
0 to Intel’s customers — large computer brands and contract
2018 2019 2020 manufacturers. Most of these entities are legally based in China,
which explains how Intel booked revenue of $20.3 billion from
Source: Company Reports China in 2020, accounting for 26% of its total revenue. This shows
that many of Intel’s adjacent industries are concentrated in China.

In particular, the $16.6 billion revenue from the United States is

at risk. If Intel makes a chip at any of its plants, and sends it to
China for low-level assembly work and then brings it back so it can
be put into a device manufactured in the United States, the chip
could be subject to tariffs. For example, in 2018, the Trump
Administration imposed 25% tariffs on $34 billion worth of
Chinese imports, including semiconductors. If the trade war
escalates, tariffs on essential products and resources for US-based
operations could face similar or stronger tariffs so profit margins
will be affected.

Furthermore, the trade war has resulted in lowered customer

confidence as Intel is subject to sudden trade restrictions,
additional or increased tariffs and export controls. This is due to
slight delays in Intel’s complex and heavily interdependent supply
chain causing compounded effects down the supply chain.

For enterprise customers, such as AWS, that make up a large

proportion of Intel’s revenue, even the slightest of delays would
result in acute losses. As it is hard to predict what trade-related
actions governments may take and how it would affect the ability
of final consumers to purchase products and services. Enterprise
customers would be very sensitive to geopolitical changes such as
an escalation of the US-China trade war. To lower risk, such
customers would look to alternative brands that are less reliant
on China or the US.

INTC Buy Call | Page 14

 In response to sudden trade war escalations, Intel would be able
to rely on its other foundries to alleviate the blow to a certain
extent. Intel also has assembly and test centres in Costa Rica,
Malaysia and Vietnam. Chips from non-Chinese wafer fabs sold to
American companies that pass through those facilities would not
be hit. Additionally, Intel only has one Chinese wafer fabrication
plant. Its other 5 global plants could temporarily expand supply in
case of trade war escalations where it is not physically or
monetarily feasible to import chips from its Chinese plant.

Hence, INTC’s stock price is subject to limited potential downside

risks by the geopolitical tension between the US and China.

Investors’ Increasing Sentimental Adherence to Social

Responsibility

In a world that is increasingly facing the worrying ramifications of

Figure 19: INTC’s ESG Ratings by S&P Global ecological devastation coupled with a push for ethical business
practices, investors are focusing on aligning themselves with
companies that embody their shared values, instead of basing
their decision making on profitability alone. Metrics such as
Environmental, Social and Corporate Governance (ESG) aim to
measure and incorporate this aspect into one’s selection of
investments that gauge to what extent do companies adhere to
them.

Source: S&P Global Intel has adopted extensive initiatives that work in tandem with
ESG such as its RISE (Responsible, Inclusive, Sustainable, Enabled)
strategy to be more accountable and to attract investors focused
on these principles. In an attempt to be more socially responsible,
Intel, in their 2020-21 Corporate Responsibility Report, have
stated they banned the use of prison labour and forced its
suppliers to continually assess and address their use of forced
labour, and sought to source minerals in a sustainable way that
isn’t ecologically damaging, adhering to OECD’s guidelines. Intel
has also strived to reduce its carbon and waste footprint and
prioritise switching to more renewable and green sources of
energy. In 2020, they achieved 82% renewable energy use and
conserved 161 million kWh of energy, sent 5% of its total waste to
landfills and applied circular economy practices to 63% of its
manufacturing waste streams.

According to S&P Global, Intel has rating of 71 out of 100 and is

ranked 11 out of 43 in the industry for adhering to ESG guidelines,
making it one of the more socially responsible companies out
there, consistently scoring high over the years. In this regard, Intel
does not face significant risks in alienating this segment of
investors. Investors can be more than assured that Intel falls in
line with their principles and have full confidence in investing as a
result. Therefore, Intel’s stock is very less subjected to the
downside risks of not complying with ESG standards.

INTC Buy Call | Page 15

 YFAC 2021
Technology Sector
Giants in Tech Industry: FAANGM • Facebook
World's largest social network, with over 1.11 billion users. It provides a place for connection via sharing photos, videos,
and text updates. Users create personal profiles and establish relationships with people and companies
Facebook Amazon Google • Apple
Apple Netflix Microsoft Specializes in consumer electronics, computer software and online services. Apple Inc. designs, manufactures, and markets
smartphones, personal computers, tablets, wearables, and accessories worldwide.
• Amazon
% of Market Cap of FAANGM vs S&P 500 Amazon. Inc. engages in the online retail sale of consumer products and subscriptions. It sells merchandise and content
1.936T purchased for resale from third-party sellers through physical and online stores.
30
1.073T • Netflix
25
Netflix, Inc. provides entertainment services, e.g, TV series, documentaries, and feature films . The company provides
250.589B 20 members the ability to receive streaming content through a host of Internet-connected devices.
2.531T 15 • Google
Alphabet Inc. provides online advertising services . It offers performance and brand advertising services. The Google
10
2.281T Services segment provides products and services. The Google Cloud segment offers infrastructure and data analytics
5 platforms, collaboration tools, and other services for enterprise customers.
1.733T
0 • Microsoft
2013 2014 2015 2016 2017 2018 2019 2020 2021 Microsoft Corporation develops licenses and supports software, services, devices, and solutions worldwide. It offers
Productivity and Business Processes segment, a set of cloud-based and on-premises business solutions for organizations
Market Cap of FAANGM and enterprise divisions.
(updated: 31 Aug 6pm)

Future Prospect – Trending Industries

Autonomous Robotics FinTech Healthcare Space Exploration Blockchain Technology

• Electrical vehicle sales to • Digital wallet users are • Demand for Humane • Satellites to bolster GDP • Annual spending on blockchain
increase to 14M units in 2025 surpassing traditional Genome Sequencing to growth by leveraging data for to reach ~ $16B by 2023
• Demand for Industrial Robots account holders by 2 increase by 110% annually, terrestrial business • Blockchain to be integrated into
is expected to rocket times, up to 130M users reaching 105M in 2025 • Satellite Broadband revenues government agencies,
• Enterprise value for • Digital leaders such as • DNA Sequencing Market to will reach $40B globally e.g. national cryptocurrencies in
autonomous platform Square Inc, PayPal, etc. are reach $21B in 2024 at 43% during the next 5-10 years ___Zimbabwe, Venezuela, etc.
operators could scale up to taking share from • Satellite connectivity market • ~20% of IoT deployments enable
annual rate
$3.8T by 2025 could approach $100B blockchain services in 2019
traditional banks • TeleDoc Health. Inc, Pacific
• Drone delivery platforms to annually over the medium • More companies use blockchain
• In 2025, US digital wallet BioScience of Calif, etc. are
reach $275B in revenue by term for transparency & security of
market would be worth holding 10% of the whole • Market for Hypersonic Flight business:
2030 industry
$4.6T to reach $270B in revenues e.g, Starbucks, Microsoft
annually