Intel Corporation (NASDAQ:INTC)

Discount Cash Flow Analysis Report

Santa Clara University - Leavey School of Business

Professor Ning Pu
Andre Blair, Matthew DeSimone, Sarah Ebrahimian, John Vlahos
Andre: Introduction, WACC Analysis
Matthew: Methodology, Final DCF Model Analysis
Sarah: Executive Summary, WACC Analysis, Assumptions
John: Data Sources, Assumptions
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Table of Contents
1. Executive Summary............................................................................................................. 2
2. Introduction.......................................................................................................................... 3
3. Data Sources......................................................................................................................... 4
4. Methodology......................................................................................................................... 5
5. Weighted Average Cost of Capital..................................................................................... 5
a. Cost of Equity........................................................................................................... 6
b. Cost of Debt.............................................................................................................. 7
c. Value of Debt............................................................................................................ 8
d. Tax Rate..................................................................................................................... 9
e. WACC Calculation................................................................................................... 10
6. Discount Cash Flow Analysis........................................................................................... 11
a. Introduction............................................................................................................ 12
b. Sales Analysis......................................................................................................... 12
c. Assumptions........................................................................................................... 14
Current Assets/Sales & Current Liabilities/Sales
Operating Costs
Fixed Assets & Depreciation
Dividend Assumption Model
Other Liabilities
Cash & Debt
d. Pro Forma Model.................................................................................................... 21
e. Unlevered Free Cash Flow.................................................................................... 23
f. Terminal Value........................................................................................................ 24
g. Implied Equity Value per Share........................................................................... 25
h. Sensitivity Analysis.............................................................................................. 25
7. Conclusion and Recommendation................................................................................... 26
8. Exhibits................................................................................................................................ 27
9. Works Cited........................................................................................................................ 39
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1. Executive Summary

The following report is a Discounted Cash Flow (DCF) Analysis of Intel Corporation

(NASDAQ:INTC). The report consists of financial data from The Center for Research in

Security Prices (CRSP), the Financial Industry Regulatory Authority (FINRA), Compustat, and

the Security and Exchange Commission's Electronic Data Gathering, Analysis, and Retrieval

system (SEC EDGAR). The report evaluates the company at the beginning of the 2019 fiscal

year (January 2​, 2019) using historical data over a five year period (2014 to 2018) and

forecasting forward to 2023.

A DCF model is a type of financial model that values a company by forecasting its cash

flows to evaluate a security, project, company, or asset using the concepts of the time value of

money. It projects unlevered free cash flow (FCF) and a terminal value using assumptions on

sales and other factors. Cash flows and the terminal value are discounted back to the present

value using the company’s weighted average cost of capital (WACC) and a series of other

assumptions. This calculates the enterprise value of the company which is used to compute the

estimated price per share. Using this method allows analysts to evaluate whether a company is

over or undervalued.

Using CRSP and FINRA, we were able to calculate the estimated cost of equity and cost

of debt. Using these two estimated values, we came to a WACC value of 11.6%. We used a

risk-free rate of 2.57% and a long-term free cash flow growth rate of 6%. We then computed our

future cash flows by making several assumptions about sales and operating costs from Intel’s

income statements and balance sheets. We found a sales growth rate of 6.54% and used this

value to project the next 5 years. Using these values, we were able to calculate an estimated
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enterprise value of $199,264 million and an equity value of $173,298 million. We concluded that

Intel’s actual price per share at the start of the fiscal year should have been $38.37, slightly lower

than the market value at the time of $44.68. With all of our calculations in consideration, we

believe that Intel was overvalued at the time and investors should have sold the stock.

2. Introduction

Intel was founded in 1968 by Robert Noyce and Gordon Moore, who were both

intelligent semiconductor technologists at Fairfield Semiconductor before leaving to create Intel.

Noyce and Moore were very important individuals within Fairfield Semiconductor as they were

the Camera and Instrument General Manager and Head of Research and Development there

respectively. As a start-up company, they began with a large fund of 2.5 million dollars given to

them by a venture capitalist named Arthur Rock. As they continued to grow, they recruited more

and more technologists from their previous company to help them progress to where they are

today (Hall).

Intel’s initial products were memory chips, including the world’s first metal oxide

semiconductor, the 1101, which did not sell well. Since then, they have expanded their product

line to include various technologies like semiconductors and flash memory drives, but their most

notable products are their microprocessors. Intel’s business strategy is mostly focused on their

ability to make newer and better microprocessors for PCs, and this is the strategy they continue

to rely on today.

Intel is headquartered in Santa Clara, California - the home of our beloved Santa Clara

University. Outside of California, the company has facilities in China, Costa Rica, Malaysia,

Mexico, Israel, Ireland, India, Philippines, Poland, Russia, and Vietnam among other places.
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Unlike many other technology companies surrounding Santa Clara, Intel is known for promoting

executive leadership from within. Paul Otellini, Intel’s fifth CEO, was a 30-year veteran of the

company, and all of his top lieutenants have risen through the ranks after many years with the

firm. Intel achieved the number one ranking and has held it ever since. Competitors to Intel

within the semiconductor industry include AMD, QualComm, Nvidia Corporation, Texas

Instruments, Toshiba and STMicroelectronics (Intel Corporation).

3. Data Sources

During our research, we used 4 different sources to gather the data for our project:

Compustat, CRSP, FINRA, and SEC EDGAR. Our team used Compustat and SEC Edgar to

download Intel’s financial statements from 2014 through 2018. The information found within the

financial statements was used as the base for our mode in order to generate our projections. Next,

our team pulled Intel’s daily stock information from CRSP and we compared Intel’s daily price

change to the daily price change of the S&P 500. Using daily price change information for Intel

and the S&P 500, we were able to calculate the cost of equity for Intel. Finally, we used FINRA

to find data for bond issuance, maturity, and yield from Intel and comparable companies (Oracle

Corporation). Since Intel only had 54 bonds at the time of our evaluation and we needed 100 to

calculate the average yield, we found an additional 46 bonds issued by Oracle with the same “A”

rating. From the bond data pulled from FINRA, we were able to calculate average maturity,

yield, and Intel’s cost of debt. After we completed our calculations for Intel’s cost of debt and

cost of equity we were able to use that information as part of our calculation for Intel’s WACC.
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4. Methodology
We employed a straightforward methodological approach to our DCF model. Our first

objective was to forecast Intel’s unlevered free cash flows through 2023 and calculate the

terminal value of expected future free cash flows for all years after that. To do this, we analyzed

historical financial data that Intel had previously filed with the SEC and relied on past trends to

formulate assumptions for future growth metrics. We used these assumptions to create pro forma

financial statements that enabled us to project Intel’s estimated future unlevered free cash flows

through 2023. We then relied on our projections of WACC and long-term future free cash flow

growth to calculate terminal value. Finally, we found our current enterprise value by calculating

the present value of our projected free cash flows through 2023 and the terminal value. After

calculating enterprise value, we calculated equity value by adding back initial cash, subtracting

initial debt, and dividing the total by the number of shares outstanding to arrive at our share price

of $38.37.

5. Weighted Average Cost of Capital

In this section, our team conducted a weighted average cost of capital calculation to use

as our proxy for the discount rate we will use later in this DCF model. Within a company, there

are typically two tiers of assets in its capital structure - equity and debt. Both equity and debt

have some levels of risk, and WACC allows us to factor in the risk of debt and the risk of equity

using a weighted average. This helps us determine a reasonable risk estimate for the entire firm;

therefore, WACC is frequently used as the preferred discount rate for firm-level cash flows. The
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formula for WACC is as follows: WACC = (weight of equity in capital structure x required return

on equity) + (weight of debt in capital structure x required return on debt) x (1 - tax rate).

a. Cost of Equity
The first step in conducting a WACC calculation is to calculate the cost of equity. There

are generally two different ways of calculating the cost of equity: the dividend growth model and

the capital asset pricing model (CAPM). For this project, we used the CAPM method because of

the various limitations of the dividend growth model. The CAPM model estimates the individual

stock returns using the combination of risk-free rate, systematic risk of the stock, and the market

risk premium. First, we found that the annual risk-free rate on our valuation date (1/2/2019) was

2.57%. Next, we needed to calculate Intel’s beta value which we did by finding the slope of the

trendline that corresponds with a graph we created with the daily returns of Intel on the y-axis,

and the daily return of the S&P 500 on the x-axis. We found this beta to be 1.19781. Next, we

needed to calculate the expected market return. Using the S&P 500 daily return data, we

calculated the annualized return for each year from 2014-2018 and took the average of this

annualized return. We found this expected market return to be 10.71%. With all of this

information, we can compute the cost of equity. The cost of equity equals the risk-free rate plus

Intel’s beta value all multiplied by the expected market return minus the risk-free rate. Using this

calculation, we reached the cost of equity of 12.32%. The following graphs and tables (Figure 1

and Figure 2) show our results for the cost of equity.

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Figure 1: Cost of Equity Data

Figure 2: Cost of Equity - Scatter Plot of Daily Stock Returns and S&P 500 Returns

b. Cost of Debt
Next, we calculated the cost of debt. There are two different ways to calculate the cost of

debt: calculating the implied costs of debt or using the term structure of interest rate to imply

yield to maturity (YTM). For this project, the second option, YTM, is used because the required

return of debt is best estimated using this method. To calculate the YTM of Intel, we plotted the

yield vs. bond maturity of Intel and Oracle (another company with A-rated corporate bonds

because Intel did not have 100 lines of bond data) on a scatter plot to imply a polynomial

estimation, as shown in the equation in Figure 4 below. This allows us to use a measure for bond
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maturity to compute the estimated cost of debt. We took an average and median calculation of

bond maturity as a plug-in to the equation created from the scatter plot. We chose to use the yield

of 1.23% created from the average calculation because it gave a higher yield as seen in Figure 3

below.

Figure 3: Cost of Debt Data

Figure 4: Cost of Debt - Yield to Maturity Scatter Plot

c. Value of Debt
Next in the WACC analysis, we had to calculate the estimated market value of debt. We

needed to find this because the prices for bonds are stale because they have not been traded for a
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long time. The way we calculated our market value of debt is as follows: market value of debt =

(long-term debt + short-term portion of LT debt) – cash & equivalents. Our market value of debt

(or net debt) came out to be $14,209 million after this calculation and this can be seen in Figure 5

below.

Figure 5: Market Value of Debt Calculation

d. Tax Rate

Finally, we calculated Intel’s estimated tax rate using data from the company’s 2014-2018

income statements. To determine Intel’s average tax rate, we subtracted the income tax expense

from income before tax over the five year period. We did not notice a trend in tax rate, as the

data ranged from 9.71% to 52.83%. We found that our average tax rate from 2014-2018 came to

25.67%. However, based on external research from the Institute on Taxation and Economic

Policy, we found that corporations paid on average 11.7% in taxes in 2018 (Gardner). We believe

this figure is a more accurate representation of Intel’s tax situation than the historical values we

based our calculation on, so we used this value as an assumption in our WACC calculation and

DCF models.
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Figure 6: Tax Rate Calculations

e. WACC Calculation
After calculating our cost of equity of 12.32%, cost of debt of 1.23%, and tax rate of

11.7%, we were able to calculate the WACC using the valuation date, share price, and diluted

shares outstanding values shown in Figure 7. Our after tax cost of debt came to 1.09%, and we

determined that our weight of debt was 6.2% and our weight of equity was 93.8%. Then, we

used the WACC formula (cost of equity x weight of equity + cost of debt x weight of debt) in

order to get our WACC value of 1​ 1.62%​.

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Figure 7: WACC Value

6. Discount Cash Flow Analysis

A DCF model is a type of financial model that values a company by forecasting its cash

flows to evaluate a security, project, company, or asset using the concepts of the time value of

money. It projects unlevered free cash flow and a terminal value using assumptions on sales and

other factors. Cash flows and the terminal value are discounted back to the present value using

the company’s weighted average cost of capital (WACC) and a series of other assumptions. This

calculates the enterprise value of the company which is used to compute the estimated price per

share. Using this method allows analysts to evaluate whether a company is over or undervalued.
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a. Introduction

In order to create a DCF model of Intel Corporation, we had to locate and organize Intel’s

financial statements and stock data for the years 2014-2018. We then consolidated this data to

calculate the firm’s WACC components which led us to being able to calculate the WACC and

DCF model. After the WACC calculations, we made various assumptions based on several

historical firm data points and metrics. Next, our team took the WACC and various assumptions

to create annualized pro-forma statements for the 5 years following our valuation date

(2019-2023). We finalized our DCF model by analyzing the net present value of the projected

future cash flows to be able to calculate Intel’s projected enterprise value which will then lead us

to an estimated share price. This section on DCF analysis will walk through the steps from our

sales and financial ratios, the WACC calculation, and the estimated share price valuation of Intel

Corporation.

b. Sales Analysis
We conducted a sales analysis by analyzing Intel’s net sales from 2008 to 2018, as shown

in Figure 8 below. After gathering the company’s sales data from Intel’s income statements, we

were able to calculate the company’s year-on-year growth. Intel’s average year-on-year growth

rate came to 7%, while its adjusted year-on-year growth came to 4.07% after accounting for

outliers. We believe that 2009 through 2011 do not accurately represent the Intel’s growth, so our

adjusted average leaves out these three years.

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Figure 8: Intel Sales Analysis Table - Yean on Year Growth

As shown in Figures 9 and 10 below, Intel’s sales increased over time, but the company’s

unadjusted year-on-year growth was more scattered. According to Intel’s sales regressed on year,

the equation of the trendline came to y = 2994.4x - 6E+06 and an R2 value of .8853.

Figure 9: Sales Regressed on Year Graph

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Figure 10: Year on Year Growth Graph

After conducting our sales analysis, we were able to calculate Intel’s compound annual

growth rate (CAGR), as shown in Figure 11. This value came to 6.54%. We used this value as an

assumption in our DCF model.

Figure 11: Growth Measures from Sales Analysis

c. Assumptions

In order to construct our DCF model, we used information from our WACC analysis

along with a series of additional financial assumptions.

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Current Assets/Sales & Current Liabilities/Sales

Next, we conducted a net working capital analysis by analyzing Intel’s current assets to

sales and current liabilities to sales ratios. In order to calculate our current asset/sales, we took

current assets for the year and subtracted cash. Our current liabilities consisted of all the current

liabilities except short term debt. We pulled our data from the company’s 2014-2018 balance

sheets and income statements. Once we determined our ratios for each year, we took an average

of all five years to come to a current assets to sales ratio of 25.57% and a current liabilities to

sales ratio of 24.46%, which we used as an assumption in our DCF model.

Figure 12: Analysis of Ratios Table

Figure 13: Net Working Capital Graph

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Operating Costs

Next, we calculated the net operating costs/sales assumption number that was used in our

model. We started by finding operating costs and costs of sales from 2014 through 2018 on

Intel’s income statement. Next, we found Intel’s depreciation from 2014 through 2018 on its

statement of cash flows. After, we calculated operating costs net of depreciation by subtracting

depreciation from the operating costs and cost of sales for each year. The next step was to locate

Intel’s sales numbers for each year from its income statement. Finally, we were able to calculate

net operating costs divided by sales, and we were able to use the value given to us in 2018,

56.48%, as the value we would use for our model.

Figure 14: Intel Operating Costs Table

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Figure 15: Net Operating Costs/Sales Bar Graph

Figure 16: Net Operating Costs versus Sales Line Graph

Fixed Assets & Depreciation

To calculate our assumption values for fixed assets we needed to find our model

depreciation rate. To start, we split Intel’s property, plant, and equipment (PPE) into

subcategories and then added them to get our total PPE number. Our group made the assumption

that 20% of the buildings and land value came from land. Next, we subtracted accumulated
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depreciation to get Intel’s net PPE. After, we calculated the average depreciation rates for

buildings/land and machinery/equipment given the average lifetimes that Intel provided.

Subsequently, we were able to calculate the average annual depreciation rate for Intel’s PPE for

each year 2014 through 2018. Finally, by taking the average of the depreciation rates from 2014

through 2018 we were left with an average depreciation rate of 16.82% to be used in our model.

Figure 17: Net vs Gross PPE/Sales Graph

Figure 18: Net vs Gross Fixed Assets/Sales Graph

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Figure 19: Analysis of Fixed Assets Table

Dividend Assumption Model

To calculate the dividend growth model we started by finding Intel’s dividend numbers

from 2014 through 2018 on the statement of cash flows. Next, we calculated the dividend growth

rate by taking the CAGR of Intel’s dividends from 2014 through 2018. Calculating the whole

period CAGR of dividends left us with 5.9% to use for projecting future growth of Intel’s

dividends.
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Figure 20: Analysis of Dividends Table

Other Liabilities

Next, to calculate the model value for other liabilities we began by finding the other

liabilities from Intel from the consolidated balance sheet. To calculate the other liabilities we

took the sum of Intel’s contract liabilities, income taxes payable-noncurrent, deferred income

taxes, and other long-term liabilities for each year from 2014 through 2018. To get the model

value we took the CAGR of the whole period, 2014 through 2018, and we were given a value of

12.4% to use as our model value for other liabilities.

Figure 21: Other Liabilities Analysis Table

Cash & Debt

For our cash and debt assumptions, we needed to calculate cash/sales, debt/assets, and

interest/debt. We started our calculations by finding Intel’s sales numbers and interest expenses
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from 2014-2018 from the income statement. Next, we found Intel’s debt and cash from the

consolidated balance sheet. To calculate our model value for cash/sales we took cash and divided

it by sales from 2014-2018 and then we took the average of the five values to give us a model

value of 27.69%. To find the debt/assets model value we took debt and divided it by assets for

2014-2018 and then we took the average value from the five years. This left us with a model

value of 20.38% for debt/assets. Finally, to calculate interest/debt we repeated the same process

of calculating the interest/debt for each of the five years and using the average as our model

value. For interest/debt we computed the value of -.55%.

Figure 22: Cash and Debt Analysis Table

d. Pro Forma Model

In order to project future unlevered free cash flows through 2023, we used our model

value assumptions (see Figure 23) and applied them to actual 2018 figures to create pro forma

balance sheets and income statements. In addition to being an established, cash-rich technology
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company, Intel’s debt weighting is a meager 6.2%. Thus, assuming that Intel would continue to

rely primarily on its cash assets to meet any financing shortfall or surplus, we used cash as a plug

variable to bring our pro forma balance sheets into balance.

Our projected sales growth rate of 6.54% annually resulted in projected sales of $97.3B

in 2023, up 37% from 2018’s $70.8B actuals. However, rising depreciation expenses -- from

$7.5B in 2018 to $34.3B in 2023 -- gradually eroded Intel’s profits; according to our model, the

company’s $23.3B in 2018 profits before tax are projected to fall to $6.5B by 2023. This

problem is made worse in light of the fact that many of Intel’s competitors in the semiconductor

manufacturing industry --including Advanced Micro Devices (AMD), one of the hottest stocks

on the market -- have outsourced their fabrication plants to other companies in anticipation of

complications related to PPE. Our anticipation of declining future profitability for Intel, coupled

with Intel’s reluctance to focus on its core competency -- the design of semiconductors -- are

both key reasons for our sell recommendation.

Our pro forma balance sheets speak to the same problem; Intel’s accumulated

depreciation is projected to increase nearly threefold between 2018 and 2023, as are its

depreciable assets at cost, for an overall increase in net PP&E to $60.8B in 2023 from $42.8B in

2018.
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Figure 23: Model Assumptions

e. Unlevered Free Cash Flow

To calculate free cash flow, we pulled our projected after-tax profits from our pro forma

income statement and added back our projected depreciation expense for the given year. We then

added back our depreciation expense, and subtracted net working capital from the equation --

first by subtracting the net increase in current assets, and then by adding back the net increase in

current liabilities. Finally, we subtracted capital expenditures and added back net interest after

taxes. This gave us our final figures for projected future unlevered free cash flows through 2023.

Figure 24: Unlevered Free Cash Flows Buildup

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f. Terminal Value

To calculate terminal value -- which is essential to our analysis because it represents the

expected value of all future free cash flows after our projected 2023 date, which we predicted in

the previous section -- we multiplied our projected 2023 free cash flow value by our long-term

FCF growth rate of 10.28%, and divided the product by the difference of our WACC (11.62%)

and our the FCF growth rate. We identified the long-term FCF growth rate of 10.28% by

analyzing the historical FCF growth rate in previous years, from 2014-2018 (see Figure 25), as

reported by Intel to the SEC. Our calculations gave us a final terminal value of $273.3B in the

2023 period.

Figure 25: Free Cash Flow Growth (2014-2018)

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g. Implied Equity Value per Share

To identify equity value and arrive at a final share price, we first calculated enterprise

value by taking the present value (using our WACC of 11.62% as a discount rate) of our

projected free cash flows through 2023 after having added our terminal value of $273B to the

final 2023 period. Then, we added back initial cash and subtracted initial debt to arrive at an

imputed equity value of $173.3B. Finally, we divided our imputed equity value by the 4.5 billion

shares outstanding to arrive at a share price of $38.37, roughly $6 lower than the $44.68 market

value per share on our valuation date.

h. Sensitivity Analysis

Figure 26: Sensitivity Analysis

The table above (Figure 26) depicts a sensitivity analysis that demonstrates the propensity

of our share value to change with changes in WACC (column) and the long-term free cash flow
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growth rate. Our share value is moderately dependent on fluctuations in both variables, and any

unexpected increases in WACC appear liable to have a significantly negative impact on the share

price.

7. Conclusion and Recommendation

Our findings indicate that, as of January 2nd, 2019, Intel Corporation’s stock is

overvalued by 16.4%; Intel shares are trading at $44.68, but we think they ought to be valued at

$38.37. Our official recommendation is to sell INTC.

Intel was once one of the dominant firms in the Silicon Valley, but it has fallen upon hard

times that will be difficult to ever fully recover from. Its competitors in the semiconductor

industry are young and nimble, unburdened by the inefficient in-house semiconductor fabrication

plants that have caused Intel to lose its competitive advantage in manufacturing. We do not

foresee an end to Intel’s production problems in the near future, and we expect Intel to continue

losing market share to its competitors. Investors seeking high returns would be wise to allocate

their capital elsewhere.

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8. Exhibits
Figure 1: Cost of Equity Data

Figure 2: Cost of Equity - Scatter Plot of Daily Stock Returns and S&P 500 Returns

Figure 3: Cost of Debt Data

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Figure 4: Cost of Debt - Yield to Maturity Scatter Plot

Figure 5: Market Value of Debt Calculation

Figure 6: Tax Rate Calculations

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Figure 7: WACC Value

Figure 8: Intel Sales Analysis Table - Yean on Year Growth

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Figure 9: Sales Regressed on Year Graph

Figure 10: Year on Year Growth Graph

Figure 11: Growth Measures from Sales Analysis

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Figure 12: Analysis of Ratios Table

Figure 13: Net Working Capital Graph

Figure 14: Intel Operating Costs Table

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Figure 15: Net Operating Costs/Sales Bar Graph

Figure 16: Net Operating Costs versus Sales Line Graph

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Figure 17: Net vs Gross PPE/Sales Graph

Figure 18: Net vs Gross Fixed Assets/Sales Graph

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Figure 19: Analysis of Fixed Assets Table

Figure 20: Analysis of Dividends Table

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Figure 21: Other Liabilities Analysis Table

Figure 22: Cash and Debt Analysis Table

Figure 23: Model Assumptions

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Figure 24: Unlevered Free Cash Flows Buildup

Figure 25: Free Cash Flow Growth (2014-2018)

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Figure 26: Sensitivity Analysis

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Figure 27: Pro-Forma Income Statement

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Figure 28: Pro-Forma Balance Sheet

Figure 29: Unlevered FCF Buildup

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9. Works Cited
Gardner, Matthew, et al. “Corporate Tax Avoidance in the First Year of the Trump Tax Law.”

Institute on Taxation and Economic Policy, 16 Dec. 2019,

itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/.

Hall, Mark. "Intel". Encyclopedia Britannica, 16 Jul. 2020,

https://www.britannica.com/topic/Intel.

Accessed 9 February 2021.

"Intel Corporation." New World Encyclopedia, . 3 Mar 2018, 22:02 UTC.

<https://www.newworldencyclopedia.org/p/index.php?title=Intel_Corporation&oldid=10

09483>. Accessed 9 February 2021.