Intel: The China Ban Is Immaterial (NASDAQ:INTC)

Introduction

With 27% of Intel Corporation’s (NASDAQ:INTC) revenue coming from China, the news of a ban on using its chips in Chinese government computers is the kind of negative development that could create significant pressure on the semiconductor giant’s stock.

However, after an initial 4% dip earlier this week, INTC stock has rebounded back up and is now trading higher than before this news broke out. Now, you’ll find multiple explanations for this resilience in the news media, including but not limited to overall end-market consumption of PCs in China being around 15% of total global consumption (and then government consumption being a fraction of that figure). According to Bernstein analyst Stacy Rasgon, the revenue impact of this ban will be in the low single digits, i.e., the top-line hit would be less than $1.5B for Intel.

With Pat Gelsinger’s “IDM 2.0 Strategy”, Intel aims to become the “Foundry of the West” (as discussed here), and given this ambition, I don’t think China necessarily fits in Intel’s long-term story. Don’t get me wrong, losing these sales (and consequent profits) will hurt Intel’s financial performance in the near term; however, this ban is immaterial to Intel’s long-term future.

An Update On My Investment Thesis For Intel

If you have followed my work on Intel, you know that before downgrading Intel to a “Hold” rating in June 2023, I held a “Buy” rating on the semiconductor giant starting in late 2021. My thesis for owning INTC stock as a multi-year play whittled down to Intel being the only “scaled” semiconductor manufacturer in the Western Hemisphere.

In light of the COVID pandemic, global semiconductor supply chains are reconfiguring, and Intel is well-positioned to benefit from this re-shoring activity. Intel is a company of national importance, and the US government’s $20B vote of confidence makes my case!

• Intel awarded nearly $20B in grants, loans by US to boost chip production

While Intel is still behind TSMC (TSM) on the process node technology, they are seemingly on track to achieve CEO Pat Gelsinger’s ambitious 5 process nodes in 4 years [5N4Y], i.e., regain process leadership by 2025-26.

Now, TSMC could pull a rabbit or two out of its hat to maintain its lead, and there’s a chance Intel could hit delays with upcoming nodes [such as 18A and 14A] as it has done in the past. For me, Intel remains a multi-year play of national importance, and I am satisfied with the progress Intel is making on the Foundry (manufacturing) front.

Here’s my research coverage (investment thesis) for your perusal:

As I have said in the past, Nvidia (NVDA) and AMD (AMD) have gazumped Intel; however, the Generative AI boom could yet bring a lot of success to the “Foundry of the West”!

A Recovery Is Already Underway At Intel

In Q4, Intel’s revenues and earnings came in well ahead of management’s guidance and consensus street estimates, with cash flow from operations jumping to $4.6B.

With the PC slump nearing an end, Intel’s Client Computing Group [CCG] revenues jumped +33% y/y to $8.8B, offsetting continued weakness in Data Center & AI [DCAI] (-10% y/y) and Network & Edge [NEX] segments (-24% y/y). Given its stronger-than-expected financial performance, Intel is now firmly in recovery mode.

For 2024, Intel is expected to grow revenues by mid-single-digits, with EPS growing ~30% y/y to $1.37 per share. While Intel’s growth pales in comparison to the Nvidias and AMDs of the world, a sales and earnings re-acceleration is a huge positive.

Is Intel Stock A Buy, Sell, Or Hold?

In my view, the reset in Intel’s business is now complete, so instead of using a revenue base of $50B, I am using TTM revenue in building my valuation model for the company. The rest of the assumptions are straightforward; however, if you have any questions, please share them with me in the comments section below.

As per these results, Intel is fairly valued at current levels; however, if one were to buy Intel at today’s price of ~$42 and hold the stock for five years, they could expect a CAGR return of ~7.7% (market-like returns). That said, since these returns fall short of the hurdle rate (10%) of our Buyback-Dividend portfolio, I continue to rate Intel a “Hold” at current levels.

Key Takeaway: I rate Intel a “Hold” at $42 per share

Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.