Intel / Crypto – Picks and shovels

Intel turns its hand to disruption.

• The first signs of Intel’s new identity are beginning to emerge with the launch of a new product that aims to challenge Chinese dominance of equipment for Bitcoin mining / Blockchain computing.
• This is something that is badly needed in this industry where the verification of transactions on the distributed ledger is inflexible, slow and expensive, all of which make the blockchain unsuitable for being the backbone of a digital economy.
• The Bitcoin mining industry is currently dominated by Bitmain and MicroBT who sell the hardware required to mine Bitcoin, but the disruption caused by Beijing’s clampdown has created an opportunity for competition to come in.
• This industry is all about energy efficiency as, after the capital cost of the equipment, the only real cost incurred by the miners is their electricity bill.
• Here, the Chinese have designed custom ASICs (application-specific integrated circuits) whose sole purpose is to run the Bitcoin mining algorithm as efficiently as possible.
• As a result, equipment from Bitmain and MicroBT lead the industry in terms of energy consumption which is why they are currently the market leaders.
• This is measured in joules (unit of energy) per terahash (unit of compute calculations) where Bitmain claims 21.5 and MicroBT claims 31.0 far better than the competition (including Intel) who are currently in the mid-fifties.
• This means that Intel has a lot of ground to make up but there are some other areas where it can make an immediate difference.
• The biggest of these is fixed pricing.
• Bitmain and MicroBT change the prices of the machines that customers have already ordered but not yet received due to the volatility of the Bitcoin price, which greatly complicates life for the miners.
• Intel is not doing this and is sticking to its normal practice of charging the prevailing price at the time at which the product is ordered.
• This will go some way towards offsetting Intel’s disadvantage in joules / terahash as future visibility has a significant economic value.
• I think that Intel is playing the long game here.
• The real future of this product line is not in Bitcoin mining but in the maintenance of the blockchain distributed ledger more generally.
• Blockchain has been touted as the backbone of the economy of the Metaverse, but its cost, speed and flexibility currently render it completely unsuitable to carry out this function.
• RFM research has found that there is no fundamental reason why the traditional payment rails cannot be used to run the economy of the Metaverse meaning that the blockchain has a hill to climb.
• Intel’s long-term expertise in designing and manufacturing semiconductors as well as its substantial resources mean that it is in a position to provide substantial competitive pressure.
• This is exactly what the blockchain needs as this pressure will accelerate competition and bring forward the time when the blockchain is in a position to run a digital economy.
• This combined with a return to manufacturing leadership is what I need to see from Intel, but substantial challenges remain.
• There is a significant risk that the x86 architecture upon which almost all of Intel’s chips are based is now obsolete and Intel needs to emphatically demonstrate that this is not the case.
• Its competitors (Samsung and TSMC) are spending more on Capex leading to the possibility that it is unable to catch up and must now resign itself to the second tier of an industry it once dominated.
• Furthermore, the financial outlook for the medium term has deteriorated exactly when it should be booming given the shortages, the semiconductor super cycle and the strong results of its peers.
• EPS for 2022 is now expected to be in the range of $3.50 which gives a 2022 PER of 12.7x which is not expensive but not exactly cheap when compared to its peers and the challenges the company currently faces.
• Intel is knocking on the door of value territory but while its earnings continue to deteriorate and the uncertainty persists, its value is also deteriorating.
• I have previously floated the idea of Intel at $44 but at that time, that would have represented a 12-month forward PER ratio of around 9.5x.
• This number is now closer to 13x which I think does not compare very favourably to Qualcomm which is still on around 15x.
• Qualcomm has none of the strategic challenges that Intel faces, is growing faster and its earnings are only 15% more expensive.
• Hence, I think Intel shares can go lower as the value argument for Intel is still too elusive to put real money behind.
• I think the shares go lower or continue to underperform their peers.