My largest holding is Intel and constitutes a sixth of my portfolio.
Intel is behind its peers technologically. In fact, its been lagging its peers from about 2014 onwards. For this reason it is currently very cheap and trades around an EV/EBIT 10-11. There are a number of reasons why I think this may turnaround:
- Financial resources
Despite lagging its peers it is still the biggest player in its space. If you compare revenues just last year gone for example, Intel took almost 8 times more than AMD, a third more than TSMC, and 3-4 times more than Nvidia. They still hold the greatest market share. Simply expressed, Intel has more financial resources than all other players in the semiconductor industry.
I think capitalism is law of the jungle. No.1 rule is to adapt to the environment. But the best placed to adapt is the biggest, strongest.
Capitalism is also about survival.
Intel has been competing in the semiconductor industry since the 70s with AMD. Neither has ever been completely wiped out (though it has been close). AMD ascended to new highs in the mid noughties when they competed with Intel in terms of tech but never took a greater market share than Intel.
I think I’ve purchased at a valuation that if Intel simply exists (i.e not even market leader) in 10 years time, I will probably have made a decent return.
The new CEO of Intel, Pat Gelsinger, is probably THE guy to turn Intel around. He started his career at Intel, under the mentorship of Andy Grove but left to join VMware when his upward path through the ladder at Intel was blocked. He has now rejoined as CEO. So far, I think he has organised the right people to take Intel forward and made a plan that continues and expands chip fabrication to compete with TSMC. I think this is the right approach in the long term.
He talks about his job in missionary terms and is very inspiring. I recommend you watch him on youtube.
- Political reasons
I don’t think the American semciconductor industry will be allowed to fail. Intel’s biggest competitor is TSMC, and effectively a proxy for Chinese soft power. Biden has made it clear the importance of semiconductors to America. In short, even if Intel gets into trouble I don’t think it will be allowed to fail, because America wants to assert its power through its tech giants.
Risk of loss
In tech it seems to be that the dominant player takes the majority of the market whilst competitiors take scraps only. It’s conceviable that Intel’s market share could be decimated in which case I could suffer a significant loss in this position. But I could probably hold unless Intel’s financial resources dwindle and I lose confidence in management, in which case, this might be the final straw and I should probably sell.
But if i lose 66% on this position, because I’m early on in my investing career this is still recoverable with approx 1/3 year savings. I don’t think I would take this level of risk on close to retirement.