Intel & Snap – Lemons and lemons

Intel Q3 2021 – The price of progress.  

• Intel reported excellent Q3 2021 results and reasonable 2021 guidance, but it turns out that investments have to be paid for before returns materialise, and it was this realisation that led the market lower.
• Q3 2021 revenues / EPS were $19.91bn / $1.67 well ahead of consensus at $18.24bn / $1.08 and the outlook for the year has remained pretty consistent despite the current shortages.
• 2021 guidance remained unchanged (implying a small Q4 2021 miss) and top-line guidance for 2022 at $74bn which is in line with expectations.
• Furthermore, Intel thinks that its investments should bring 10-12% top-line growth over the next 4 to 5 years representing an acceleration that is not reflected in the market’s expectations.
• The cost of this for a couple of years is lower gross margins as the company is in investment mode which will lower gross margins to 51-53% for the next 2 to 3 years.
• The short-term obsessed market is now pricing in no return from the new investments and all of the costs meaning that those who missed the first rally may get another shot at buying the shares cheaply.
• The caveat is whether or not one thinks that Pat Gelsinger can pull off the IDM2.0 transformation of Intel and if Apple is anything to go by, one would not be optimistic.
• This is because Apple continues to demonstrate that it can run all of its devices, including the high-performance MacBook Pros, using its in-house processors which are based on Arm.
• This raises the question of whether the x86 processor is now obsolete but because there is no x86 processor available on the equivalent node to TSMCs 5nm, this question remains unanswered.
• A good portion of Apple’s improvements with its new chips may be coming from TSMC’s 5nm process node rather than from its own expertise and therefore not exclusive to Apple.
• Should this prove to be the case (which I am leaning towards), then Intel should be able to catch up and re-establish the performance superiority of the x86 processor.
• The lower gross margins in 2022 have pushed the consensus EPS estimate down meaning that the shares are now trading on 13.2x 2022 PER.
• By comparison, Qualcomm is on 14.2x 2022 PER and carries far less risk as it is not in a make-or-break transition.
• Therefore versus Intel, Qualcomm represents a lower risk proposition and therefore better value in my opinion.
• This is why I think Intel may yet go lower from here giving me another opportunity to own the shares.

Snap Q3 2021 – Christmas lemons.

• Snap reported reasonable results but guided badly as its customers are less able to track the performance of the advertisements, they place on Snap’s service making them much less valuable.
• This combined with the supply chain disruptions has made its clients unable to meet further increases in demand making a seasonal increase in advertising unnecessary.
• Q3 2021 revenues / Adj-EPS were $1.07bn / $0.17 compared to consensus at $1.1bn / $0.08 indicating that the impact in Q3 2021 has been pretty mild.
• As a result, Q4 2021 revenues are expected to be $1.17bn – $1.21bn which is meaningfully below the consensus estimate of around $1.35bn.
• Snap firmly laid the blame for a lot of this miss on Apple and went on to bemoan that the system that Apple has created to allow advertisers to measure their advertisements does not work well.
• Consequently, it is engaged in developing its own offering to mitigate this impact, but it will be some time before this is available.
• Unsurprisingly, Snap’s shares were hammered in Friday’s trading falling by 27% with 7x the normal number of shares trading.
• This is the problem with having companies that trade at very high multiples as when things are great they go up a bit and when there is a problem, they get hammered.
• In my opinion, this creates a risk-reward scenario that is unattractive which is why I continue to steer clear of these types of companies.
• There is also an obvious read-across for the rest of the digital ecosystems who monetise their services through advertising which is why they also came under pressure on Friday.
• I think this read-across is mostly about a weaker pick-up due to companies not needing to advertise to get more revenues as opposed to anything that Apple has done.
• Google and Facebook both report this week and as both are priced for growth, there may be further weakness if this issue has also impacted them.
• I suspect that they are both in a better position to weather this issue as both are critical to the digital advertising strategy of many companies and so I suspect that if cuts are going to be made, they are likely to disproportionately impact Snap.
• However, I continue to be pretty cautious on most of the FAANG names and I do not own any of them (with the exception of Alibaba).