Intel: Stay Away From Falling Knives

Investment Thesis - Intel Corporation (INTC) has lost around 37% of its value since mid-June, and the stock remains significantly overvalued [1] - The company's capital-intensive business model is inefficient compared to fabless players like NVIDIA (NVDA) and Advanced Micro Devices (AMD) [1] - Intel's strategic decision-making has apparent flaws, and the company is weaker positioned to compete with more flexible and aggressive rivals [1] Recent Developments - Intel's latest quarterly earnings underperformed consensus estimates, marking the second consecutive quarter of missed revenue forecasts [2] - Revenue declined by 1% YoY, and adjusted EPS deteriorated from $0.13 to $0.02 [2] Balance Sheet Analysis - Intel's total outstanding debt is $53 billion, which is more than $20 billion higher than its outstanding cash [3] - The company's balance sheet is weaker compared to NVDA and AMD, with NVDA having a massive net cash position and AMD's balance sheet being much cleaner [3] - Intel's total debt to equity ratio is 44.03%, significantly higher than AMD's 3.97% and NVDA's 17.22% [4] Profitability and Business Model - Intel's operating margin and EBITDA margin remain significantly lower compared to historical levels, despite the AI-driven boom in the industry [5] - The fabless business model of NVDA and AMD appears more efficient in driving growth and innovation, with NVDA's TTM revenue now almost two times higher than Intel's [5] - Analysts from Citi suggest that Intel should exit the foundry business to improve efficiency [5] Wall Street Sentiment - Prominent Wall Street firms, including JPMorgan Chase, Goldman Sachs, and Bank of America, have downgraded Intel to "Sell" following its latest earnings report [6][7] - The sentiment around Intel's next quarterly earnings release is pessimistic, with 32 downward EPS revisions over the last 90 days [9] Upcoming Earnings - Quarterly revenue for the upcoming earnings release is expected to be $13.06 billion, almost 8% lower YoY [9] - Adjusted EPS is expected to plunge from $0.41 to -$0.03 [9] Strategic Decisions - Intel's acquisition of Mobileye Global Inc (MBLY) for $15.3 billion has not paid off, with MBLY losing around 70% of its value since the acquisition [11] - Intel is considering selling more shares of MBLY, indicating potential flaws in the due diligence process before the acquisition [11] Valuation - Intel's stock has declined by more than 60% YTD, significantly underperforming the broader U.S. market and the iShares Semiconductor ETF (SOXX) [12] - The company has a "D+" valuation grade from Seeking Alpha Quant, with a forward non-GAAP P/E ratio of 72.95, indicating significant overvaluation [12] Discounted Cash Flow (DCF) Analysis - Intel's fair value is estimated to be below its current market capitalization, even after incorporating an unrealistic FCF margin expansion trajectory [16][17] - The DCF model suggests that Intel is still around 30% overvalued, with a -28% upside potential [16] Seasonality and Short-Term Outlook - Intel's stock historically performs better closer to the year-end, suggesting a potential short-term rally in the coming months [18] - Despite fundamental weaknesses, Intel's stock rallied by 90% in 2023, driven by the AI boom in the stock market [19] Bottom Line - Intel remains a "Strong Sell" due to significant overvaluation, a weaker balance sheet compared to rivals, and deteriorating profitability [20] - The company's CAPEX-heavy business model limits its ability to focus resources on growth and innovation [20]