Intel: A Cheap Defensive Cash Flow Machine

Tech stocks are in a slump. Sure, the damage isn’t that bad on the headline Nasdaq 100 Index, which has fallen as much as 8% from the recent highs. However, under the surface, speculative growth stocks are getting killed. Cathie Wood’s Ark Innovation ETF (NYSEARCA:ARKK), for example, is down 32% from its peak. Amid such selling, tech investors are looking for safety. And few companies meet that standard better than Intel (NASDAQ:INTC) stock.

The Intel (INTC) logo in blue on a black screen.
Source: Kate Krav-Rude / Shutterstock.com

Intel has underperformed the tech stock indexes over the past few years. It’s perceived, with some good reason, as a slow-moving and fairly stodgy firm that has been outpaced by more nimble competitors. However, people writing it off prematurely will be surprised. Intel is still a dominant firm throwing off immense profits and which will shelter investors whenever markets turn sour.

The Semiconductor Boom

The price of tech stocks has soared over the past few years. That’s doubly true for semiconductor firms in particular. The industry has enjoyed an incredible ramp up in demand. This has come from a variety of factors, such as cryptocurrency mining, increasing usage in smart connected devices such as home appliances, and a lack of sufficient investment in the semi sector in recent years.

Now throw in the pandemic and its ensuing supply chain mayhem, and semiconductor firms are having historically good fortune. Unfortunately, their share prices already account for all that… and then some.

INTC Stock: A Cheap Option Amid Overheated Sector

Consider AMD (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA). Since 2015, AMD has soared from trading at less than 1x sales to 9x sales now. Nvidia, meanwhile, surged from 5x revenues to 23x revenues over the same period. Maybe these companies have gotten so much better over that time span that they are worth five or ten times as much per dollar of revenues as they used to be. In all likelihood, however, they have not.

On an earnings basis, NVDA stock is now going for 73x trailing revenues. That’s amazing. We’re near the top of the semiconductor demand cycle. As if that weren’t enough, cryptocurrencies such as Ethereum (CCC:ETH-USD) are set to switch to proof-of-stake mining algorithms which will eliminate large chunks of graphic chip demand.

Intel, by contrast, is selling for less than 3x revenues. Its valuation ratios haven’t inflated dramatically in recent years. Indeed, INTC stock is trading at around 11x earnings, which is downright cheap in this market. While the company has had its technical stumbles in recent years, the business is still steady, and analysts see it returning to outright growth in 2023.

Intel’s Situation Is Much Better Than Folks Realize

Intel has ceded some market share in both data center and personal computing chips in recent years. The company has failed to reach needed technical specifications on several fronts, letting AMD in particular regain its momentum.

However, traders have vastly overestimated the scope of Intel’s problems. It has grown revenues each of the past five years through 2020. While 2021 will likely be a down year, it should return to growth in the near future. The company’s earnings have also grown sharply in recent years even with the company’s well-publicized technical issues.

Indeed, in 2020, Intel generated $35 billion in cash flow from operations and $23 billion of operating income. Both of those represent record highs for Intel in a year. AMD, by contrast, generated just $1.1 billion of cash flow and $1.4 billion of operating income for full-year 2020.

Despite Intel being ten times as profitable and cash flow generative as AMD, it sells for just a 50% greater market capitalization. Notably, Intel also spends $13 billion per year in research & development as opposed to just $2 billion at AMD. Over time, be wary of counting out the dominant player with a huge advantage in scale, profitability, and research capacity.

INTC Stock Verdict

For traders that think that the current growth correction is almost over, Intel isn’t the best buy today. Intel isn’t going to be a stock that can likely double or triple in six months. However, if you’re looking for a more defensive name that can hold its ground if the current sell-off turns into a full-on collapse, INTC stock is a strong pick.

The company’s large and predictable cash flow streams insulate it from near-term shocks. It pays a healthy dividend. Its research & development budget is enormous, giving it ample firepower to develop industry-leading new products. And its various other ventures, such as self-driving vehicle technology, offer an appealing upside beyond the core business.

On the date of publication, Ian Bezek held a long position in INTC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/intc-stock-a-cheap-defensive-cash-flow-machine/.

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