The Semiconductor Industry Association (SIA) announced worldwide sales of semiconductors were $48.8 billion in October 2021, an increase of 24.0% from the October 2020 .
Additionally, forecasts project annual global sales will increase by 8.8% in 2022. To put things in perspective this is the Growth experienced by the industry since 1987
The biggest company in this growing industry is Intel, yet due to management failures the stock price has not reflected this reality.
Having high growth companies like AMD trading at a forward P/E of 42 when Intel is trading at just 13.9 forward P/E.
We can also look at the Market Cap for comparison, the Market Cap for Intel is 204 Billion while delivering 17.3 Billion in free cashflow. On the other side AMD has a Market Cap of 168 Billion and delivers only 2.96 Billion in free cashflow.
We have reached this situation because of management and production difficulties over the last 3-4 years. Intel’s strategy has been to produce their own semiconductors banking that this will allow them to have better margins then their competition.
Unfortunately this lead to Intel’s manufacturing woes that began three years ago when the company fell behind schedule on a new transistor known as 10 nanometer (10nm). This delay forced Intel had to reconfigure its chipmaking fabs to add more capacity for an older technology. At that time, Intel assigned Murthy Renduchintala, an executive vice-president, to ensure that even-smaller 7nm transistors would debut as planned in late 2021. But a recent announcement indicates that 7nm requires a retrofit that will delay it by a full year.
Meanwhile companies like AMD used TSMC ( Taiwan Semiconductor Manufacturing Company) for the production of their chips, they dealt only with the design side, allowing them to take the performance crown from Intel and fueling their growth.
Turn around
It’s worth noting that the previous strategy has worked out for Intel’s competition, but the same strategy comes with risks and drawbacks that are not factored yet in the stock price. Almost half the semiconductor production (fabrication) market is done by TSMC.
This exposes any company that uses them to natural disaster risk, Taiwan is in a seismically active zone that has experienced more then 91 major earthquakes in the last 120 years, to that we can add floods, fire, problems with manufacturing and not the least, political risk coming from China. And AMD is not the only company exposed to this risk, every Fabless semiconductor company is.
Meanwhile Intel doubles down and will spend over $20 billion to build two major factories in Arizona. And plans to invest between 60 and 120 billion in fabrication facilities.
They also started to iron out the production problems and their 12th generation of processors are delivering close performance to their competition .
Not only is Intel recovering some of the gap but they are also going after the TAM of TSCM .
In conclusion
Intel is a company with a reasonable valuation in a industry that has high growth ahead, it is also going after a large TAM (the fab market) and provides the ability to exploit any problems Taiwan might experience in the future. All while paying a good dividend for the trouble of holding their stock.
Add to that the possibility of selling out of the money calls for a regular premium.
