A Diamond in the Rough? Intel is a Buy for me Despite Worries

As Warren Buffett always says:

Right now as I look across stocks to buy, there are less and less stocks that are trading at bargain prices. 

But when I come across Intel, it peaks my interest as I see metrics like the following:

– P/E ratio of 9

– Debt to Equity ratio of only 0.44

– Dividend Yield of 2.7% with a payout ratio of only 24% and a history of raising dividends

– Revenue growth of 20% YOY for Q2

– Net profit margins at 30%

So why is Intel down compared to it’s competitors and the industry?

The one thing that is shadowing all of those amazing fundamental metrics is the delay in the 7nm chips for their PC market (shifting 6 months according to the earnings report). This fear of lost market share and therefore future revenues is what Intel ultimately has to overcome.

While PC market makes up around 48% of its net revenue as a business, that isn’t necessarily the growth engine for Intel.  Data Centric revenue is the one area that is growing rapidly at a mind boggling 43% YOY for Q2.

So even if Intel does lose some ground in the PC market, they are losing ground in the market that as a whole is a shrinking industry.

Looking at the below graph, you’ll see that the PC shipments from 2012 to now has been on a slow decline.

If you take a look at current market share for the laptop market for Intel compared to AMD, you’ll notice that Intel has a massive lead. Intel has over 80% of the market share!

DCG is the growth engine for Intel and their focus on cloud service that you see massive growth from companies like Microsoft/Google/Amazon. The future is all about the cloud and Intel has already taken a large market share in an area that is bound to continue to see massive growth.

Straight from their latest earnings presentation this infographic shows the areas that Intel will be focusing on to maintain market share in the PC market and push forward to higher growth.

So while yes the competition is heating up around Intel, I don’t believe that they are going to just put their heads into the sand and let everyone just eat their cake. 

They are spending on R&D, have a strong balance sheet, their free cash flows are strong, and the market is afraid right now of lost revenues from delays in production of next gen chips. All that being said, I feel like for a long term buy and from a value perspective Intel seems like a good buy at these levels. 

The market is discounting for lost market share in the PC markets and increase in capabilities from their competition. My bet is that Intel doesn’t just sit idle. 

I’ll take my chances with the company that can earn it’s market cap in earnings over 9 years! Plus it shares a market with its competitors that will continue to be in demand and grow in the future, so with that all ships can rise together.