Even if stagnant, Intel’s free cash flow (NASDAQ: INTC) may be undervalued by investors
Band Goran Damchevski
This article originally appeared on Simply Wall St News
Intel company (NASDAQ: INTC) is a US $ 218 billion market capitalization company that has experienced volatility over the past three years. The stock had many ups and downs and ultimately returned 15.9% during that time. Volatility has selected a certain type of investor, and we will examine whether the stock is suitable for long-term holders.
The value of stocks can be derived in several ways, the two most common approaches are growth stocks, when a company is in a high growth phase, and the other being the value phase, when cash flow of a stock are poorly valued and have the potential to increase due to efficiency gains, value-maximizing policies or other enablers.
See our latest analysis for Intel
Before estimating the value of Intel’s cash flow, let’s preview an overview of the company’s performance:
NasdaqGS: INTC Performance Snapshot, October 6, 2021
Intel achieves revenue of $ 77.6 and has a relatively high profit margin of 23.9%. Profits are expected to slowly decline and maintain a stable level around US $ 17 billion. This may be a warning to some investors, and that’s why we’ll see how much of the net income translates into free cash flow for investors.
Today we are going to go over one way to estimate the intrinsic value of Intel using the Discounted Cash Flow Model (DCF).
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Crunch the numbers
In general, we assume that a dollar today is worth more than a dollar in the future, we therefore need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 11.3 billion||US $ 12.0 billion||US $ 12.3 billion||US $ 14.5 billion||US $ 15.4 billion||US $ 16.2 billion||US $ 16.8 billion||US $ 17.4 billion||US $ 17.9 billion||US $ 18.4 billion|
|Source of growth rate estimate||Analyst x13||Analyst x4||Analyst x2||Analyst x2||Est @ 6.16%||Is 4.9%||Is 4.02%||Is 3.4%||East @ 2.97%||East @ 2.67%|
|Present value (in millions of dollars) discounted at 7.3%||US $ 10.5k||$ 10,000||US $ 10,000||US $ 11.0k||US $ 10.8k||US $ 10.6k||US $ 10.3k||$ 9.9,000||$ 9.5,000||US $ 9.1k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 102 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step.
For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth.
Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 7.3%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r * g) = US $ 18B × (1 + 2.0%) ÷ (7.3% * 2.0%) = US $ 353B
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 353 billion ÷ (1 + 7.3%)ten= 175 billion US dollars
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives Total value of equity, which in this case is US $ 277 billion.
Compared to the current share price of US $ 54.0, the company seems an undervalued key at a 21% discount from where the share price is currently trading.
The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
NasdaqGS: INTC Discounted Cash Flows October 6, 2021
We can see that while Intel is not a growing company, the company’s huge cash flow can be understated even at current levels.
Our model suggests that in times of stability or the emergence of a catalyst, the stock has upside potential. Keep in mind that this won’t necessarily happen, as macroeconomic trends and competitors can drive investors away from Intel.
Key points to remember
Intel has the potential to converge in value even at current levels. The stock’s cash flow appears to be mispriced, which could leave an opportunity for investors.
The company has a volatile stock price and reduced growth. This might have led some investors to pull out of the company as it transitioned to a value stock. The company itself can always innovate and increase its efficiency, which is one more reason why the current share price may not be able to exploit the full potential of the technology.
If you think our model needs some tuning, feel free to try your own DCF by shifting some settings. Consult our calculator HERE.
When considering Intel, there are three other fundamental elements you should explore:
- Risks: Take risks, for example – Intel has 1 warning sign we think you should be aware.
- Future benefits: How does INTC’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you might not have considered!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock, you just need to search here.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.