Understanding the Why's - with AI or No AI

Some readers have asked me how I view AI’s impact on Company Research. My take is that while AI has transformed company research, a holistic approach is even more crucial now.

Here are the impacts:

• Data Abundance: Simply, AI has revolutionized data collection. It allows us to access vast amounts of information more efficiently than ever before. From financial statements to industry articles, sentiment analysis, and social media trends, AI helps us gather diverse data points.
• Quantitative and Qualitative Insights: AI-driven models analyze historical data, identify patterns, and predict future trends. Quantitative analysis has become more robust and data-driven. They can also summarize long documents and draw conclusions (not exact wording).
• Timeliness: While the above can be done by humans, speed is where AI truly triumphs. Real-time data feeds and automated algorithms enable quicker decision-making. Investors can react swiftly to market changes, news events, and company announcements.

In my previous edition, I emphasized that company analysis involves both conducting a left-brain analysis and forming a right-brain opinion. While having more data and faster access to it is beneficial, it’s essential to apply follow-up diligence and common sense to avoid hasty conclusions.?

• The Left-Brain and Right-Brain Balance:

- Left-Brain (Analytical): AI excels at left-brain tasks—processing data, running regressions, and identifying correlations. It’s the logical, quantitative side of analysis.

- Right-Brain (Intuitive): However, reaching a well-rounded opinion requires more than data crunching. The right brain brings intuition, concepts, and qualitative insights. It’s where judgment and creativity reside.

• Avoiding Misinformation:

- Data Overload: While AI provides more data, it can also overwhelm us. Without follow-up diligence and common sense, we risk misinterpreting signals or reacting impulsively.

- Critical Thinking: Apply critical thinking to AI-generated insights. Ask questions like: What biases might exist? Is the data relevant? What’s the broader context?

Health of a Company and Financial Data:

• Analogous? to Medical Diagnosing: Just as doctors use various tools (from pulse-taking to MRIs), financial analysts use diverse data sources. Financial statements, industry reports, sentiment analysis, and alternative data are like diagnostic tests.
• Root Cause Analysis: Financial data reveals a company’s health. But like a doctor, we must dig deeper. What drives revenue growth? Are there operational inefficiencies? Is management effective?

Holistic Approach:

• Quantitative + Qualitative: Combine left-brain analysis (quantitative metrics) with right-brain insights (industry dynamics, competitive positioning, management quality).
• Storytelling: Present your findings in a compelling narrative. Explain how financial data aligns with qualitative observations.

Just as doctors consider both data and patient history, investors must blend data-driven analysis with intuition to form a complete picture of a company’s health. AI serves as a powerful tool, but it cannot replace human judgment.

If I were to “diagnose” Intel’s current financial health, this would be my approach:

1. The symptoms

• Top line revenue started to experience decline in Q1 FY2022 and the pace accelerated for one year when it dropped to $11.7 billion, down 36% year-over-year, leading to a staggering loss of $2.8 billion—the largest in the company’s history:

• The declines were particularly pronounced in the renamed Datacenter and AI Group (fka Data Center Group) and the newly created Network and Edge Group, which suffered respectively a 25% and a 31% YoY decrease in sales from 2022 to 2023. They continued to show no growth in the last five quarters and are dragging down the total revenue number:

2. The diagnosis

• By analyzing the Financials:

i. Multi-quarters of Restructuring Charges and Asset Writedowns and one quarter of Impairment of Goodwill have been taken:

ii. Compared to previous years, last three years Accounts Receivables have increased, Accounts Payables have decreased, Dividend Paid has been more than halved, and Repurchase of Common Stock has stopped:

iii. But CapEx spending actually increased:

• From the sick(?) horse’s mouth

i. Intel’s explanation and outlook when it reported its 2022 Q1 earnings when it was still forecasting 2022 Q2 revenue of $18 billion (vs. the actual reported $15 billion) and 2022 full-year revenue of $76 billion (vs. the reported actual $63 billion).

ii. Still sees 2024 Q2 revenue falling below midpoint due to US chip export ban to Huawei

• By independent analysis

i. A 10-page analysis from CRN on Pat Gelsinger’s three year (2021-2023) tenure as Intel’s CEO

ii. An analysis from the Tech Monitor on the impacts of geopolitics, with on one-hand the dole out of billions of dollars from the US CHIPs Act, vs. the other hand-slap on Intel’s exposure to China.?

3. The prognosis

• EBITDA Margin turned around
• Price Action based on market sentiment reversed?
• NTM P/E Multiple based on Street Estimates came down

The fundamental question should be asked:?

What will it take for Intel to surpass Nvidia and AMD in the chip industry, as well as TSMC and Samsung in semiconductor manufacturing??

The answer to the first should be within the next six to 12 months. We’ll find out how Intel’s Gaudi 3 chip performs compared to AMD’s Radeon and Ryzen series and Nvidia’s Hopper, Blackwell, and Rubin series. For more insights into the HBM technology used in these chips, you can refer to an earlier edition: “Deep dive into the supply chain of the HBM Chip”

On the second, rather than solely focusing on its traditional role as an Integrated Design Manufacturer (IDM), Intel has embraced a more inclusive approach exemplified by TSMC.?

This shift was heralded by the launch of the "World's First Systems Foundry,” a strategic move aimed to challenge Samsung’s position and ultimately become the world’s second-largest foundry by 2030.

While the outcome remains uncertain on whether Intel will be successful in overtaking its formidable top 1 & 2 competitors in each of the spaces it wants to play in, a short-term idea could be to determine what other chip designers, equipment manufacturers, and A(ssembler)P(ackaging)T(esting)s could be part of Intel’s supplier chain as it embarks on its World’s First Systems Foundry strategy with the $8.5 billion funding from the CHIPS Act.?

However, as the aim of this newsletter, we also research and offer counterpoint views. Two offers from Bloomberg on whether Intel will actually get all the money promised or why this same Act has put Intel in an awkward position are extra food for thought, or to keep the theme of this newsletter, extra electrons to stimulate your left- and right-brain cells during these scorching summer days!