Why $INTC Only Fell By -3% on Yesterday's Announcement of NVIDIA's ARM-based PC Chips
Warren Buffett's "Rule No. 1: Never Lose Money" In Real Life
A good business isn’t necessarily a good stock, and vice versa — what matters is the gap between price & value, and whether a sufficiently large mispricing exists. This is what Buffett meant by, “Price is what you Pay, Value is what you Get”.
"We think no asset is so bad that there's not a price at which it's attractive for purchase, and no asset is so good that it can't be overpriced." - Howard Marks
Yesterday, I published my INTC 0.00%↑ Part 1 report after championing it privately for a long time, and having received a lot of requests to write about it. The timing of the report could not have been worse — NVIDIA announced its new lineup of ARM-based PC processors on the exact same day, which is bad news for Intel as it’s expected to make a serious dent into Intel CCG segment’s legacy CISC-based PC processor market share.
I’ve previously covered why the ARM architecture is expected to become the future of PC semiconductors in the article below — and in the interest of brevity, do give it a read if you’d like to find out more:
However, astute investors of Intel will make one weird observation — INTC 0.00%↑’s share price only slid by -3.1% upon the supposedly catastrophic news. This meager decline is further compensated by the fact that many other megacap stocks also slid by 1-2% yesterday while the S&P 500 index itself slid by -0.2% — implying that the earthshaking NVIDIA announcement only crushed Intel’s shares by an incremental 1-2% vs. the rest of the market.
Why might this be the case? If we can accept the premise that markets aren’t perfectly efficient (as most value investors believe), one natural explanation for this could be that Intel’s share price had already been trading at unfairly depressed levels prior to NVDIA’s announcement. Another explanation might be that this news was already priced in, as markets could have already long predicted that such a move by NVIDIA and AMD was possible — this aligns with the common financial doctrine of share prices moving ahead of fundamentals. Regardless, investors in INTC 0.00%↑ didn’t really suffer too much from yesterday’s news.
Recall that as investors in secondary stock markets, we are exposed to the risk:reward of Intel’s share price, rather than its Net Assets per se (i.e. business fundamentals)1. Hence, if share prices detach excessively to the downside from fundamental value — as they appeared to have done for INTC 0.00%↑ prior to yesterday — then the actual investment risk exposure is relatively mitigated, even if the business should suffer a much larger setback. Of course, the opposite is also true — if share prices detach excessively to the upside from fundamental value due to excessive optimism on the underlying fundamentals (e.g. NVIDIA’s 100x trailing PE today), the actual investment risk exposure will be relatively higher.
The correct way to conceptualize this phenomenon is to first embrace that markets can indeed by inefficient at times, and in such times share prices can detach from their underlying fundamentals. Subsequently, you can imagine that share prices represent a second layer of risk:reward exposure on top of the first layer of risk:reward exposure represented by the underlying business fundamentals. As a calculus teacher might pronounce, you get to the total probabilistic risk:reward exposure by multiplying both layers of risk:reward exposure by each other. An expensive share price offsets good fundamental value; whereas a cheap share price offsets poor fundamental value.
This is quite different from the common wisdom of perfectly efficient markets that share prices accurately reflect all publicly known information of underlying business fundamentals. If we can accept the premise that markets can be inefficient, it gives us new tools to play with as investors in pursuit of asymmetric risk:reward. And by exploiting mispricings in valuation, it becomes possible to achieve both low risk and high reward — at the same time, as described in the article linked below:
This is the foundation of one of Howard Marks’s truism: "We think no asset is so bad that there's not a price at which it's attractive for purchase, and no asset is so good that it can't be overpriced." As I’ve mentioned in my earlier Value Investing primer, the final investment return is also conditional on the (share) price paid rather than merely the (business) value acquired. This is not to say that share prices should be viewed in isolation; quite the contrary, prices should always be viewed relative to fundamental value.
The problem arises when investors prioritize value at the expense of price — e.g. buying wonderful businesses at any price. Valuation is just as important of a performance indicator to the final investment return as underlying fundamentals are — miss either one and risk missing the forest for the trees. A good business isn’t necessarily a good stock, and vice versa — what matters is the gap between price & value, and whether a sufficiently large mispricing exists. This is what Buffett meant by his quote, “Price is what you Pay, Value is what you Get”.
To circle back to yesterday’s INTC 0.00%↑ developments, I would be remiss to let the opportunity to illustrate what asymmetric risk:reward looks like in real-time slip. Value investing is particularly concerned with protecting the safety of investment principal — hence a proactive effort is always made upfront to ensure that downside exposure is mitigated. The best way to do this is to invest at highly depressed prices only, otherwise hold cash if no such opportunities present themselves. Not only does this give your investment an ample downside buffer (i.e. margin of safety), it also gives it the same 2x upside as any “growth factor” stock — simply via a reversion to fair value. In industry lingo, we call this asymmetric risk:reward.
This is also why value investors seemingly tend to gravitate towards “value factor” stocks with low multiples. Far from being a dogmatic ideology to invest only in cigar butts and net-nets, investing in low multiple stocks provides the investment with both low potential downside and high potential upside — like INTC 0.00%↑ in the former’s case, which is something that high multiple stocks are unable to supply. When Buffett pivoted from Graham’s cigar butt style to Fisher/Munger’s compounders style, he did not forget the importance of prioritizing the safety of investment principal which Graham taught him. “Wonderful business at fair price” still implies that the same margin of safety exists as in that of any cigar butt stock.
Furthermore, the enduring beauty of this approach is that it amply applies to managing downside in a professional context (i.e. volatility) as well. While value investors hold fast to the tenet that Volatility isn’t Risk, the reality is that redemption risk does exist when managing NAV funds. It can be especially unnerving for clients to see their share prices collapsing following the fundamentals of their underlying business deteriorating. Conversely, being able to demonstrate low ST volatility amidst deteriorating fundamentals (like with INTC 0.00%↑ yesterday) can provide your fiduciaries with an additional layer of comfort that their investment principal remains safe — and that their fund manager is trustworthy, as he has amply prepared for such possibilities in advance.
In next week’s upcoming Intel Part 2 report, we shall dive into the future of Intel IFS, the macro theater surrounding it, Intel’s Smart Capital Strategy — as well as address some of the credible concerns surrounding it today, such as its Gross Margin & FCF trajectory, its pivot into the highly capital-intensive external foundry business, playing EUV catch-up, ability to execute, market competitiveness with incumbents TSMC & Samsung, PC chip undercompetitiveness vs AMD, and accelerator trends favoring NVDIA spend.
Subsequently, we will use everything we’ve explored in Part 1 as business context to perform a deep-dive into Intel’s historical financials, its future financial performance trajectory, and to arrive at its LT fair value. If the value investing methodology of buying a dollar for 50 cents as aforementioned appeals to you, do check out our Intel stock reports below!
Also check out some of our earlier stock reports!
The underlying assumption in stock markets is that they are perfectly efficient, which implies that the share prices of companies price-in all publicly known information. Value investors make the opposite case, which is that mispricings can exist even after accounting for all publicly known information only.
Aaron, this is a great take on INTC and what just happened.
If you could somehow make a hybrid human of Marks and Klarman and just sort of drop that person off at my place, I'm pretty sure I would never want for interesting conversation.
Thanks for sharing these thoughts.