Many investors and analysts see nothing but trouble for Intel (INTC +12.93%) right now. The semiconductor giant reported disappointing fourth-quarter results across the board and set up weak guidance targets for the next quarter. Chipzilla looks deeply flawed, maybe even broken. From the most bearish analyst to Wall Street's biggest Intel bull, every financial firm lowered their price targets on the stock in unison.
I don't agree with the doom-and-gloom conclusions people are drawing from Intel's latest report. Instead, I see a company facing macroeconomic headwinds at an unfortunate time, under a management team with a straightforward, reasonable plan of action to tackle this perfect storm of complications.
Intel's plan of action
Intel CEO Pat Gelsinger made this plan perfectly clear on the earnings call. This brief passage gets straight to the point:
We will: One, return to profitability and deliver the benefits of our calendar year '23, '24, and '25 efforts to reduce costs and drive efficiencies; two, execute on our internal foundry P&L by 2024; and three, expand on the use of our smart capital strategy to leverage multiple pools of capital, including skips and chips in the U.S. and Europe to balance our long-term capacity aspirations with near-term realities.
That's exactly what I wanted to hear as a longtime Intel shareholder. This management team realizes that many of the difficulties Intel is facing are macroeconomic issues, so they're focusing on correcting what they actually have the power to control instead.
Here's how Gelsinger's soliloquy breaks down in simpler English:
- The company is cutting costs over the next three years, aiming for stable, profitable growth by the end of 2025.
- Intel is reorganizing its operations, separating its chipmaking foundry business from semiconductor design projects. This split was announced last October and is expected to contribute $3 billion of efficiency-related cost savings in 2023. By the end of 2024, you'll see the so-called internal foundry operating model reflected in Intel's quarterly reports.
- Finally, Intel is committed to investing in its own future growth, but also flexible enough to skip expensive projects or chip down its budgets in order to meet its cost-saving goals. Those budget proposals aren't written in stone.
In the spirit of data-driven engineering, Intel has set up nine specific groups of operating improvements, each tied to measurable metrics and incentive structures for the people who work on them. As a result, the delayed implementation of manufacturing process upgrades that haunted Intel in recent years now appears to be a fading memory; Gelsinger said that the company is on track to deliver five process nodes in five years.
Gelsinger's Intel looks like it's well on its way to overcoming the macroeconomic pressure it has been tackling since 2020. The stock price is down 41% in 52 weeks, hovering near lows not seen since 2015. Rising dividend payouts and falling stock prices add up to a dividend yield of 5.2%.
What's not to like, right?
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Key Data Points
Can you trust Gelsinger's ambitions?
I understand if you don't want to take Gelsinger's words at face value: Is the CEO putting eye shadow on a skunk here?
Always in motion is the future, and Pat Gelsinger's crystal ball is no better than yours or mine. Master investor Warren Buffett famously loves reading financial statements but is also known for disregarding management's guidance targets. Creating targets out of thin air may inspire business leaders to make poor long-term decisions in order to reach a short-term goal. "Bad things" can happen due to unreasonable targets, Buffett says.
The skepticism is duly noted, and I agree that firm financial targets years in the future rarely make sense. I don't even know what I'm having for breakfast tomorrow, and you want me to believe that someone has foreseen the financial effects of every twist, turn, tax cut, pandemic, and Dallas Cowboys road win in the playoffs of the next three years? I don't think so.
That being said, Gelsinger has access to more information about Intel's business operations than any of us outsiders, along with the ability to make real-world changes as necessary. Furthermore, I like his clear-eyed view of Intel's priorities in an unpredictable world.
"I want to remind everyone that we are on a multiyear journey," Gelsinger said in the fourth-quarter call. "We remain focused on the things that are within our control as we navigate short-term headwinds while executing to our long-term strategy."
Investing in Intel during the dip
All things considered, Gelsinger will have to deliver on his promises, at least as far as the internal operating tweaks go. Given the fact that recessions and bear markets usually don't last very long, I believe it when Intel's leaders talk about a potential upturn as early as the second half of 2023.
Until then, I wouldn't recommend betting the farm on Intel, but the stock looks undervalued, and you can't complain about that generous dividend yield. Picking up a handful of shares during this dip could serve you well when a refreshed economy allows Intel to fire up its throttled growth engines again.
