Stock of the Week


September 4th 2020

Industry: Semiconductors
Price as of 9/4: $50.08


The major averages continue to chug along with the Nasdaq and S&P 500 making new all-time highs while the Dow Jones moved into positive territory for the year. However, the breath of the rally has deteriorated. The rally over the last several weeks can be summed up in one stock, Apple. Before the stock split, Apple was contributing more and more influence on the S&P 500 and the Dow Jones Industrial Average. A few months ago, Apple and Microsoft were battling for the largest US market cap stock. But now, Apple is valued at more than half a trillion more than Microsoft, the widest gap since 2012. A similar gap has occurred in the chip space. This week we will highlight the largest chipmaker based on sales, Intel.

Even though Intel leads all chipmakers in sales, they lost their reign as the sectors' market cap leader to Nvidia following a production delay on their next generation chip. Intel's delay caused a 20% pullback in the stock providing a buying opportunity for long term investors looking for income and growth.

In July, Intel easily beat earnings expectations as sales rose 19.5% to $19.73 billion, well ahead of estimates of $18.55 billion. Intel also raised earnings and revenue estimates for the full year thanks to strong sales to data centers, but the stock dropped 20% as Intel disclosed their next generation 7nm chip would be pushed out another six months to a year giving AMD and Nvidia the edge to pick up market share. In the last six weeks, AMD's stock is up 50% while Nvidia has risen 25% surpassing Intel in market cap. The gap in valuations of the three chip stocks is dramatic as AMD trades for 9 times sales and 50 times earnings. Nvidia trades for 28 times earnings and 11 times sales.

Intel, on the other hand, trades for just 10 times earnings and less than 3 times sales while still generating a ton of cash or over $4 billion in free cash flow a quarter with $25 billion already in the bank. Based on their cash flow, Intel announced an accelerated share buyback agreement to repurchase an aggregate of $10 billion of common stock or 5% of their outstanding shares. Intel's buyback will complete a $17.6 billion buyback initiated last year.

Intel will spend a majority of the $10 billion before year end providing downside protection with management buy on dips for the foreseeable future. If history is any indication, money managers will eventually diversify away from the high-flying tech stocks like Apple, Nvidia and AMD and back into more value-oriented stocks like Intel. In the meantime, Intel shareholders can collect the 2.7% dividend with the potential for dividend boosts in the future as the payout ratio is only 25% of cash flow.

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