Update on Intel stock since last July
Buying the laggards makes sense to me
Last July I wrote an article suggesting that Intel might be the best bet on the emerging AI trend, based on the idea that the more Fabs that are dedicated to this expanding market the more valuable those Fabs become not just for AI related chips but for all computing chips. Intel had traded down to US$25 a share about the time of the article, and Wall Street was agog with NVidia, Qualcomm, Broadcom and Microsoft, and for good reason. These excellent companies were going to benefit from the emergence of AI technology. All have seen their trading prices rise since last July but as it turns out, Intel was the winner. By the time I published my article, INTC stock had risen to US$34 a share so that is the appropriate base for comparison.
Sell-side advisors and analysts were virtually unanimous that NVidia was the stock to own in the AI game and Intel was dead in the water. Wrong.
Here is the outcome to date.
I am pretty old-fashioned about investing and prefer higher returns to lower ones. The only stock I held in the chip space was Intel and it has worked out just fine. I never follow the latest fad since share prices tend to discount expected growth and by the time I have information that suggests an area is going to benefit from rapid technology advances I am far too late - the price gains are already in the stock. So I rather boringly study each name in some detail, develop financial models of the company’s operations based on publicly available data, and buy the one or two that have the best combination of opportunity and being unrecognized by the market.
Intel met those criteria. The company is rapidly expanding its fabrication facilities in United States and abroad and has demonstrated exceptional competence over decades. Expanding Fab capacity is a long game and the US$88 billion plan to expand in Europe and US$50 billion plan to expand in Arizona (well underway) is likely to pay off with typical after-tax returns on capital in the 15% to 20% for Intel (based on its history). When complete, those investments should add somewhere around US$20 billion to Intel’s annual income and at a price to earnings multiple of about fifteen times, more than double Intel’s market capitalization from its current level of about US$200 billion.
Intel recently announced the cancellation of a planned expansion of its Vietnam facilities, focusing its efforts on United States and Europe. That makes sense to me. The geopolitical risk in Asia keeps rising, China seems bent on assimilation of Taiwan, and the risk of conflict is higher than normal. Intel’s operations are relatively small (about 2,800 employees) and Intel noted risks to power supply and concern over bureaucracy in the country according to Reuters. Vietnamese agencies deny these risks are the culprit.
Successful investing combines wisdom with patience. Patient money should benefit from an investment in Intel despite the intense competition in the chip space. Why? Because there is no evidence that demand for chips is likely to start falling any time soon and Intel has an earned track record of accomplishment in the space.