Computer processor maker Intel (NASDAQ:INTC) beat analyst expectations in Q3 FY2021 quarter, with revenue up 4.68% year on year to $19.1 billion. Guidance for next quarter's revenue was surprisingly good, being $19.2 billion at the midpoint, 5.17% above what analysts were expecting. Intel made a GAAP profit of $6.82 billion, improving on its profit of $4.27 billion, in the same quarter last year.
Intel (INTC) Q3 FY2021 Highlights:
- Revenue: $19.1 billion vs analyst estimates of $18.2 billion (5.02% beat)
- EPS (non-GAAP): $1.71 vs analyst estimates of $1.11 (53.6% beat)
- Revenue guidance for Q4 2021 is $19.2 billion at the midpoint, above analyst estimates of $18.2 billion
- Free cash flow of $5.89 billion, up 14.5% from previous quarter
- Inventory Days Outstanding: 106, up from 95 previous quarter
- Gross Margin (GAAP): 55.9%, up from 53.1% 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.Intel’s 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.
Intel's revenue growth over the last three years has been slow, averaging 4.66% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $18.3 billion to $19.1 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).
While Intel beat analysts' revenue estimates, this was a very slow quarter with just 4.68% revenue growth. But at least Intel's revenue turned from decline to year on year growth this quarter, news that will be likely appreciated by shareholders.
While revenue growth flipped positive this quarter, and Intel is guiding to growth of 4.72% YoY next quarter, Wall Street analysts think this is a short term uptick, forecasting a decline of 7.84% 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 106, 7 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Intel's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 55.9% in Q3, up 2.9 percentage points year on year.
Intel's gross margins have been stable over the past year, averaging 56.2%, and remains well ahead of most of its semiconductor peers, indicative of a potent competitive offering, pricing power, and solid inventory management.
Intel reported an operating margin of 27.1% in Q3, down 2.3 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 29.8%. However, Intel's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 28.4% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Intel's free cash flow came in at $5.89 billion in Q3, up 32% year on year.
Intel has generated $18.6 billion in free cash flow over the last twelve months, translating to 23.7% of revenues. This is a great is a strong result; Intel's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
Intel’s average return on invested capital (ROIC) over the last 5 years of 23.3% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Intel's Q3 Results
Sporting a market capitalization of $201 billion, more than $34.6 billion in cash and with positive free cash flow over the last twelve months, we're confident that Intel has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly Intel outperformed analysts’ earnings expectations this quarter. And we were also glad that the revenue guidance for the rest of the year was upgraded. On the other hand, it was less good to see the inventory levels increase and the revenue growth was quite weak. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $49.69 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. Although Intel is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there.
Intel's price to earnings ratio based on the next twelve months is 11.8x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Intel doesn't trade at a completely unreasonable price point.
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