A question that sooner or later many people have to deal with when building their wealth: am I buying the securities in my portfolio that have become cheaper? Or would I rather increase the positions that went well because there are successful companies behind it? Today many people bought a position that fell last. Obviously, more than they think is justified. This is about the American chip manufacturer Intel Corp. ($INTC).
One thing is indisputable, the trend towards digitization is uninterrupted. As a result, the demand for laptops, for which Intel supplies its famous processors, continues to grow. Intel is also benefiting from the growing demand for cloud solutions: the market share of Intel’s processors in this area is between 90% and 95%. In both areas, Intel can generate very high margins through its own production.
Its direct competitor AMD is slowly but surely struggling to gain market share from Intel in many segments. In addition to declining market shares, the battle for constant innovation in processors is becoming increasingly fierce. AMD is also starting to catch up with the development of new, faster, more efficient and smaller processors and putting Intel under great pressure. Nonetheless, Intel has been able to hold its own so far by increasing profits by about 15% per year over the past 5 years. However, this is currently not reflected in the stock price: the 52-week high is about 40% above the current stock price. In the following, we will therefore first discuss the main triggers for this development.
In the middle of the year, Apple announced that it would gradually switch its Macs from Intel processors to its own chips starting in late 2020. A bad sign that has probably led many investors to forgo their Intel shares. But more symbolically, Apple’s share of Intel’s total sales is estimated to be only 2-5%.
A short excursion to the topic of semiconductor technologies. Processors consist of small transistors, the size of which is specified in nanometers (nm). In simple terms, it can be said that the smaller these small components are the less energy the computing process requires. In addition, the processors are space-saving and more powerful. Understandably, manufacturers are trying to develop smaller processors as quickly as possible to gain a competitive edge. Unfortunately, in practice it’s just a guideline and in reality Intel’s current 10nm processors are roughly comparable to the 7nm processors the competition has produced at TSMC.
Intel recently had to announce that the introduction of 7nm technology, which was scheduled for the end of 2021, will be delayed for at least 1 year and will therefore not take place until the end of 2022 or early 2023.
Nonetheless, Intel is currently leading the way. The recently introduced Tiger Lake processors are still based on 10nm technology, but still beat AMD’s Ryzen processor in recent tests. The server segment counterpart should also be available this year. AMD will of course not be inactive either and will refill it as well. However, healthy competition is no reason for me to lose faith in Intel as a stable dividend payer.
For many investors, the problems outlined above speak against investing in Intel. However, many reasons have been forgotten that speak for Intel’s continued success. Still there are severals reasons to believe in Intel.
Intel acquired Mobileye in 2017 for an impressive amount of 14 billion euros. The goal of the car supplier from Israel is to provide the technology that enables fully autonomous driving of cars. The company works with car manufacturers around the world and sells its camera systems to well-known customers such as BMW, Volkswagen and Tesla. By supplying its systems to car manufacturers, Mobileye also collects the raw material of the future in the form of route information and traffic situations: data. For Intel, the acquisition means not only strong revenue growth in a billion dollar market, but also diversification of the desktop and server markets.
As a second building block for the future, Intel acquired the Israeli company Habana Labs in 2019. The start-up develops processors that are optimized for use in AI calculations. This acquisition strengthens its position in the field of artificial intelligence – a future billion-dollar market.
A comeback is not impossible. The latest figures show that sales can continue to grow strongly. With a P/E of 8 to 9, investors consider Intel to be seriously undervalued and therefore triple the current position. In order to achieve the long-term goals, investors have set criteria for their purchases. They check these criteria with a next purchase and see: all criteria – even if only a little bit – are met without exception. The subsequent purchase is therefore again a correct and important step on the way to financial independence.
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