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Morningstar | Intel Outlines Compelling Roadmap to Renew Its Semiconductor Leadership at 2019 Investor Meeting

We attended Intel’s 2019 investor meeting and came away with our positive thesis on the chip titan reaffirmed. The meeting represented the first chance for Intel’s new CEO Bob Swan (former CFO) and CFO George Davis (former Qualcomm CFO) to outline their strategy for a semiconductor behemoth under the most competitive pressure in recent memory. Although management gave themselves relatively manageable targets of $77 billion in sales in three years (and $85 billion by the 2022-2023 timeframe), which implies low-single-digit top-line growth from 2018, we applaud the firm’s transparency and frankness in discussing Intel’s outlook. Specifically, management discussed key acquisitions (Mobileye and Altera) as well as strategic endeavors (modem and memory) to identify both successes and failures, while outlining evaluation criteria. Positively, the 10-nanometer process is on track with products set to ship in June, and Chief Engineering Officer Dr Murthy Renduchintala noted 7-nm will ramp in 2021 with EUV lithography, along with a bevy of product launches throughout 2019 and 2020 on 10-nm (including server chips early 2020). With shares trading at a meaningful discount to our unchanged $65 fair value estimate, we believe wide-moat Intel represents one of the most attractive opportunities in the technology sector.

Management was also forthcoming in admitting competitive pressures and the accelerated ramp of two processes with multiple products will create gross margin headwinds leading to a 57%-60% range (versus recent 60%-plus levels). Intel will undertake aggressive operating expense controls (slashing of noncore spending such as exiting 5G smartphone modems for $200-$300 million savings) to pursue 25% opex as a percentage of sales, culminating in relatively unchanged operating margins of 32%. Furthermore, Swan highlighted the free cash flow to earnings per share gap as a top priority, with 2019 guidance implying free cash flow/non-GAAP EPS at 75% versus 62% and 66% in 2017 and 2018, respectively. By 2021, the firm aims to hit over 80% in FCF/EPS. All in, these targets appear attainable and are consistent with our expectations as well as Swan’s finance-oriented background. We believe intensified competition from the likes of AMD and Nvidia will bring the best out of Intel, and the its cohort of seasoned industry veterans in Renduchintala, Raja Koduri, Jim Keller, Navin Shenoy, and Naveen Rao lead us to believe the firm will be able to successfully execute on its process and product roadmaps.