Intel (INTC) is the global leader in integrated design and manufacturing of microprocessors, the “brain” within computers and servers. Intel also manufactures motherboard chipsets, network interface controllers, flash memory, graphics chips, embedded processors and other devices related to communications and computing. Intel employs over 110,000 people worldwide with about 90% of the workforce working in technical roles.

LEADING INNOVATOR

Amid the tumult of 1968, two integrated circuit industry pioneers, Dr. Robert Noyce and Dr. Gordon Moore, left their leadership roles at Fairchild Semiconductor to form Intel. Intel, a portmanteau of Integrated Electronics, opened its doors with $2.5 million in venture capital funding. Dr. Andrew Grove, a survivor of the Nazi Holocaust and the Soviet invasion of his native Hungary, soon joined his former Fairchild colleagues. Together, Moore and Grove defined driving principles of the digital age: Moore’s law predicting transistor density on integrated circuits would double about every two years, leading to performance, size and cost improvements and Grove’s assertion that innovators would continually find new applications for microchips unimaginable a year or two earlier.

In April 1969, Intel released its first products which included the first mass produced memory chip that relied on silicon gates rather than metal and the first dynamic random-access memory (DRAM) chip. Because DRAMs were cheaper and used less power, they quickly became the standard memory devices in computers worldwide. Following its DRAM success, Intel went public in 1971. That same year, Intel engineers serendipitously invented the erasable programmable read-only memory (EPROM) chip, the company’s most successful product line until 1985. As DRAM chips became commoditized due to foreign competition, Intel successfully shifted from memory chips to microprocessors, which powered the explosion in personal computing.

With over 50 years of continuous innovation and countless technological breakthroughs undergirding it, Intel now has its sights set on powering new applications like artificial intelligence, quantum computing, 5G, Internet of Things (IoT), autonomous cars and network equipment.

PROFITABLE OPERATIONS

Intel has enjoyed solid growth during the past five years with revenues, net income and EPS compounding at 7%, 17% and 19% annual rates, respectively. Intel’s business is highly profitable with double-digit profit margins. Intel consistently generates high returns on shareholder equity hovering around 20% for more than a decade, a sign of the company’s durable competitive advantages.

ROBUST FREE CASH FLOW

With strong free cash flows totaling more than $63 billion during the past five years, Intel’s capital allocation strategy is to: invest in the business to strengthen its competitive advantage by plowing 20% of revenues into R&D; make strategic acquisitions to spur growth of data-centric opportunities; and return cash to shareholders. Since 2015, Intel returned $59 billion to shareholders through dividends and share repurchases. The company has paid a dividend in each of the past 112 quarters, a commendable record. The dividend compounded at an average 7% rate during the past five years with the solid dividend currently yielding 2.7%. On August 17, 2020, given that the stock was trading well below management’s intrinsic valuation, Intel announced an accelerated share repurchase program to buy back $10 billion of its stock.

SECOND QUARTER RESULTS

Intel reported second quarter revenues increased 20% to $19.7 billion with net income increasing 22% to $5.1 billion and EPS increasing 29% to $1.19 on fewer shares outstanding. Results were driven by strong sales of cloud, notebook, memory and 5G products as digital services and computing performance became essential during the COVID pandemic. This strong performance was overshadowed by management’s disclosure that its next generation 7-nm central processing unit (CPU) will be delayed by at least six months to mid-2022, stoking concerns that competitors may take market share from Intel. During the first half, Intel generated $10.6 billion in free cash flow and paid $2.8 billion in dividends. Intel ended the quarter with nearly $26 billion in cash and investments, $36 billion in long term debt and $82 billion in shareholders’ equity. Despite the challenges, full year 2020 revenues are projected to be $75 billion with EPS of around $4.53.

Long-term investors should consider chipping Intel into their portfolio, a high quality leading innovator with profitable operations and robust free cash flow. Buy.