Intel (NASDAQ:INTC) Misses Q4 Sales Targets, Stock Drops

Computer processor maker Intel (NASDAQ:INTC) fell short of analyst expectations in Q4 FY2022 quarter, with revenue down 31.5% year on year to $14 billion. Intel made a GAAP loss of $661 million, down on its profit of $4.62 billion, in the same quarter last year.

Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is the leading manufacturer of computer processors and graphics chips.

Founded in 1970 by Gordon Moore, Robert Noyce, and Andy Grove, Intel’s first business was actually focused on building memory chips,dynamic random-access memory (DRAM). The company had a near monopoly in the late 1970s, before Japanese competitors crushed Intel on pricing, prompting one the great pivots in tech history when it switched its focus to computer processors and was selected by IBM to provide the processor for the first PC in 1981. Intel’s x86 processor architecture subsequently became the industry standard for PCs, transforming the company into the dominant provider of chips used in PCs and data centers for decades.

Once revered for both its R&D and manufacturing prowess, Intel failed to diversify into growing end markets such as smartphones, 4G/LTE, and GPUs because it didn’t want to get into these (at the time) smaller and less profitable end markets - especially when it had a near monopoly in the highly profitable CPU business.

Over the past decade, Intel’s manufacturing edge first stagnated, and today trails rivals TSMC and Samsung, reducing its pricing power and margins. Intel faces ongoing challenges as its former x86 strongholds in PCs and datacenters are threatened by GPUs and ARM-based alternatives.

Intels primary competitors are Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NDVA), and Qualcomm (NASDAQ:QCOM).

Processors and Graphics Chips

Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

Sales Growth

Intel's revenue has been declining over the last three years, dropping annually on average by 3.06%. Last year the quarterly revenue declined from $20.5 billion to $14 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

This was a difficult quarter for Intel, with revenue declining 31.5%, missing analyst estimates by 3.1%.

Intel's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 40% YoY next quarter, and analysts are estimating 3.15% declines over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

This quarter, Intel’s inventory days came in at 141, 36 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Intel's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 39.1% in Q4, down 14.5 percentage points year on year.

Despite declining over the past year, Intel still retains industry average gross margins, averaging 42.1%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.

Profitability

Intel reported an operating margin of 4.28% in Q4, down 20.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Operating margins have been trending down over the last year, averaging 11.8%. Not a great indicator for Intel, whose operating margins are already a bit below average for semiconductors, driven by only modest pricing power and cost controls.

Earnings & Competitive Moat

Wall St analysts are expecting earnings per share to decline 142% over the next twelve months, although estimates are likely to change post earnings.

Over the last 5 years Intel has averaged a 15.9% return on invested capital (ROIC), implying it has a very healthy competitive position and a track record of investing in profitable growth.

Key Takeaways from Intel's Q4 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Intel’s balance sheet, but we note that with a market capitalization of $122 billion and more than $28.3 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak, investory has been building up and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 7.11% on the results and currently trades at $27.94 per share.

Is Now The Time?

When considering Intel, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Intel we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its high return on invested capital suggests it can grow very profitably and has been well managed, the downside is that its growth is coming at a cost of significant cash burn and its operating margins are below average vs. semiconductor peers.

Intel's price to earnings ratio based on the next twelve months is 17.1x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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