What Intel’s Price Ratios Tell Us about Its Valuation
Intel’s price ratios
Long-term investors rely on the fundamental valuation of a company to know whether the stock’s price justifies its true value. A company’s price ratio helps us compare its stock price with its fundamentals, such as earnings, sales, and cash flows, which help us understand the company’s true valuation.
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Intel’s (INTC) PS (price-to-sales) ratio fell from 2.93x in April 2017 to 2.64x in August 2017. This suggests that investors are willing to pay 2.6 times per dollar of sales. Intel’s PS ratio is less than Advanced Micro Devices’ (AMD) and Nvidia’s (NVDA) PS ratios of 2.5x and 11.6x, respectively.
This gap in PS ratio is justified by the huge gap among these three companies’ revenue growth. While Intel’s and AMD’s revenue grew by single-digit percentage points, NVDA’s revenue grew 36% YoY (year-over-year) in calendar 2Q17.
A company’s PE (price-to-earnings) ratio tells us the amount investors are willing to pay per dollar of EPS (earnings per share). This is the most popular ratio because EPS reflects the earnings available to shareholders after deducting all expenses.
Intel’s PE ratio fell from 17.5x in April 2017 to 13.3x in August 2017. This means that investors are willing to pay 13 times Intel’s EPS. Intel’s PE ratio is way below NVDA’s PE ratio of 46.5x and the industry average of 22.8x. By contrast, AMD does’t have a PE ratio because it’s still operating in annual losses.
Intel’s low PE ratio indicates that the stock is undervalued, as investors have not factored in the company’s venture into self-driving cars and artificial intelligence.
However, the PE ratio may not be ideal if the companies we’re comparing have different capital structures and business models. For instance, fabless companies like AMD and NVDA have low depreciation, whereas Intel, which runs its own fabrication facilities, has high depreciation.
A company’s EBITDA (earnings before interest, tax, depreciation, and amortization) removes these effects and shows a company’s operational efficiency, and so the price-to-EBITDA ratio is likely a better measurement for comparing the profitability of the above three companies.
Intel’s price-to-EBITDA ratio fell from 7.7x in April 2017 to 6.6x in August 2017. This is way below NVDA’s ratio of 34.9x. AMD had a ratio of -42.7x because its last-12-month operating income is negative.
Intel’s price ratios have declined over the past five months and have remained weaker than those of its peers. These low price ratios show that Intel stock is currently undervalued—and has growth potential, as its fundamentals are strong.