Computer processor maker Intel (NASDAQ:INTC) reported results in line with analyst expectations in Q1 FY2022 quarter, with GAAP revenue down 6.7% year on year to $18.3 billion. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $18 billion, 2.93% below analyst estimates. Intel made a GAAP profit of $8.11 billion, improving on its profit of $3.36 billion, in the same quarter last year.
Intel (INTC) Q1 FY2022 Highlights:
- Revenue: $18.3 billion vs analyst estimates of $18.3 billion (small beat)
- EPS (non-GAAP): $0.87 vs analyst estimates of $0.79 (9.58% beat)
- Revenue guidance for Q2 2022 is $18 billion at the midpoint, below analyst estimates of $18.5 billion
- Inventory Days Outstanding: 119, up from 103 previous quarter
- Gross Margin (GAAP): 50.3%, down from 55.1% 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 unimpressive, averaging 3.54% annually. Last year the quarterly revenue declined from $19.6 billion to $18.3 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).
Despite Intel revenues beating analyst estimates, this was still a slow quarter with just 6.71% revenue growth. Intel's growth turned to declines this quarter, signal that the current downcycle is deepening.
Revenue growth went from positive to negative this quarter, and Intel expects it to stay negative next quarter with an estimated decline of 8.31% YoY and analysts think the declines will continue, with next twelve months estimated at 2.18% declines.
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 119, 19 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 50.3% in Q1, down 4.8 percentage points year on year.
Intel's gross margins have been mostly stable over the past year, averaging 54.2%, and remain ahead of other semiconductor companies, pointing to a solid competitive offering, good cost controls, and little in the way of pricing pressure.
Intel reported an operating margin of 23.1% in Q1, down 7.9 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 26.1%. However, Intel's margins remain one of the strongest in the industry, driven by its solid 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 25.9% 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 $5.54 billion in Q1, up 252% year on year.
Intel has generated $16.5 billion in free cash flow over the last twelve months, translating to 21.3% of revenues. This 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 22.5% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Intel's Q1 Results
With a market capitalization of $184 billion, more than $38.6 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were impressed by how strongly Intel outperformed analysts’ earnings expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company currently trades at $39 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.
Intel's price to earnings ratio based on the next twelve months is 13.5x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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