Today's menu

• Donald’s deal

• Intel analysis

• Conclusion

A bunny suit is a protective garment worn inside a microchip foundry. They don’t usually have ears. Intel made bunny suits famous - see their commercial below.

Donald's deal

The U.S. government's equity stake in Intel is funded by repurposing grants worth $8.9 billion for new investment in Intel.

This $8.9 billion adds to the $2.2 billion Intel already received, bringing the total government investment in Intel to $11.1 billion.

The government will acquire 433.3 million primary shares of Intel common stock at $20.47 per share, representing a 9.9% stake in the company.

Here’s where it gets tricky.

The current share price is $24. That means, the US government got $10.4 billion of stock for a price of $8.9 billion.

Or...

If you include the first $2.2 billion, they paid $11.1 billion for $10.4 billion of stock.

Which one is it?

I think its the first one (they paid 8.9 and got 10.4), either way, it wasn’t free.

Intel’s stock price

Intel is a designer and manufacturer of microchips called CPUs (central processing units). A CPU is the brain of your computer. In fact, your computer might have a sticker on it saying "Intel Inside” because most computers use Intel chips.

Intel is no average company, they are the people that invented the first microprocessor - the microchip that became the foundation of the entire digital age. Without Intel, the technological world as we know it, would not exist.

Intel is legendary - when I was an engineering student, Intel inspired me to focus on semiconductors. An industry I would later join.

Unfortunately, recently Intel has missed the boat. The world now needs tons of GPUs (graphics processing units) and less CPUs. Don’t get me wrong, the world still uses CPUs, but with the rise of artificial inteligence (AI), GPUs are in demand.

The result - Intel’s stock price is down 44% over the past 5-years.

Here are some of the reasons why the stock is down:

• Revenue declined due to the cooling PC market

• Market share losses

• Missed opportunities in AI

• Manufacturing challenges

• Restructuring costs

• Declining profit margins

Right off the bat this doesn’t sound good for the US Government’s investment.

Revenue

Revenue is sales. The green bars in the graph show revenue and the orange ones show operating profit (EBIT). Immediately, we see problems. Over the past two years, revenue has dropped from $79 billion to $53 billion.

As revenue dropped, operating profit diminished and became operating losses.

EBIT means earnings before interest and taxes. It is also known as operating profit or losses.

If a company has operating losses, then it cannot make enough money from the sale of products to cover its costs.

This is a red flag for Intel 🚩.

Profit margins

The operating profit margin, is where you divide operating profit by sales and get a percentage. You can compare this percentage between companies or previous years, to see if things are getting better or worse.

For Intel, things are getting worse, the lovely green bars (profits) have become red bars (losses).

Return on invested capital (ROIC)

What is ROIC? It is the return that the company makes in given year. You can think of it like the interest on your savings account. Higher is better.

Intel’s return has become negative. As I’ve mentioned many times before, as a rule-of-thumb, anything above 15% is good. Negative is bad.

We usually talk about Return On Capital Employed (ROCE), but I just showed you a graph of ROIC. Don’t worry, it’s very similar and tells you the same thing. Here’s a link to a previous article, which explains the difference.

Free cash flow (FCF)

Free cash flow is an important number. This is not profits - which are accounting numbers, this is the actual cash that the company makes. Cash can be used to pay for things, profits can’t. Free cash flow is the lifeblood of any business.

And Intel is spending more cash than it is making.

For a while, you can spend more than you make. You can use your savings, or you can get new investors, or you can borrow money. But eventually, those options dry up. That is when a company goes bankrupt.

Intel is not bankrupt, but this is another red flag 🚩.

Dividends

Companies that make money and have some left over, pay it to their shareholders as dividends. If you look at the FCF graph above, you will see that free cash flow became negative in 2023.

Lo-and-behold, the dividends in the graph below were reduced in 2023. Can’t pay dividends without cash.

And things have gotten worse, you will see that dividends have now been suspended. In corporate finance, when a company suspends its dividend, it indicates problems. That is a big red flag 🚩.

Stock-based compensation (SBC)

SBC is paying people with shares instead of cash. I’m not a big fan of SBC because managers enrich themselves by giving themselves pieces of your company.

However, in this case, Intel is paying with stock because they don’t have cash. Paying with stock is a cash conservation tactic, so I guess it makes sense here.

However, not sure who wants to get paid with stock that is going downward.

Debt

When companies are in trouble, they borrow money. Here are Intel’s debt ratios:

• Debt / Capital = 32%

• Debt / EBITDA = 6.5

Debt to capital at 32% is not bad. It means 32% of the company’s assets are funded by debt.

Debt to EBITDA at 6.5 means that if all the profit was used to pay debt, it would take Intel 6.5 years to pay it off. That is a high number - in a bad way.

Capital expenditure (capex)

Capex is a fancy term to describe a company buying equipment. Intel has its own foundry - the factory where microchips are made. Foundries require constant investment because the technology has to be upgraded continuously.

In the semiconductor industry, there’s a thing called Moore’s Law. It states that the number of transistors on a microchip doubles every two years. The entire semiconductor industry has followed this law for decades.

Practically, that means microchips are constantly getting smaller and more efficient. Moore’s Law is named after Gordon Moore.

Who is Gordon Moore? One of the founders of Intel.

I repeat - Intel is legendary.

But as the graph below shows, Intel has recently reduced their capex. This is probably a cash saving measure. This is not good in the long-term, because semiconductor businesses need to invest in new technologies and upgrade manufacturing constantly.

Buybacks

In addition to dividends, companies can return cash to shareholders by buying back shares. Buybacks are the opposite of selling shares. Sometimes companies use buybacks to mask giving shares to staff (SBC).

The graph below shows the shares available. As we can see, they are increasing, not decreasing. That means Intel is not doing any buybacks. In fact, Intel has been issuing more shares. This is likely to raise cash for operations.

This is another red flag 🚩.

Valuation

The price-to-earnings ratio (or P/E ratio) is a measure of how expensive a stock is. If we use the S&P500 index as measure of the market, we see that it has a P/E ratio = 27. This is quite high by historical standards. It means that investors are paying for 27 years of profits up front.

By contrast, Intel is on a P/E ratio = 97. This is a very high number, because profits have been dropping. It tells us that the company is expensive.

Conclusion

Intel is in distress and I don’t think a quick fix is on the cards. Intel will have to get its products and manufacturing sorted out to become profitable again.

From the government’s point of view, instead of giving away billions in grants, they got some shares in a struggling business.

Is that a good thing?

That might be okay for them, with free taxpayer money and strategic aspirations of keeping manufacturing alive in the USA.

For me as an investor, Intel is legendary, but it is not Extraordinary. That means there is no room for it in the Extraordinary Companies portfolio.

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