Why Intel today isn't Netflix and Meta Platforms in 2022; You need to have good filters for potential stock ideas

1) Today, let's continue the conversation on chip giant Intel (INTC)...

In Friday's e-mail, I took a first look at the company, whose stock is down 62% this year and down 72% from its most recent high of more than $68 per share in April 2021.

I looked at Intel's income statement, cash-flow statement, and balance sheet – all of which were ugly. Annual profits have declined from more than $20 billion as recently as 2021 to almost zero, while free cash flow ("FCF") has reversed from $21.4 billion in 2020 to negative $12.6 billion in the past 12 months... which has driven net debt up to $22.5 billion.

"Well of course," you might be thinking.... "That's why the stock is down so much. Isn't this what you always see in this kind of situation?"

My answer is usually yes... But as an investor, you want to find the rare situations when a company's stock collapses but its financials remain strong.

It's generally in these situations where I find the best turnaround opportunities, with multibagger upside potential for the stock.

So today, I'll give two recent examples of large tech companies – Netflix (NFLX) and Meta Platforms (META) – whose stocks fell even more than Intel's, but whose financials remained much stronger.

Their strong financials were a major reason why I was pounding the table on both of them back then... but I'm not doing so today in the case of Intel.

To start, the five-year price charts below for Netflix and Meta show both stocks' 75%-plus collapses from late 2021 to late 2022... and their massive recoveries since then:

Now let's look at what I was seeing on their income statements, cash-flow statements, and balance sheets when their stocks bottomed versus Intel's today.

We'll start with Netflix...

The company reported disappointing first-quarter 2022 earnings on April 19 of that year, which dropped the stock to as low as $162.71 per share on May 12. When it comes to revenue and net income, here's what investors would have seen at the time over the previous four years:

Revenues grew every quarter, both year over year and sequentially, and profits had rebounded strongly in the latest quarter to the second highest of all time.

Up next is the cash-flow statement, with cash from operations, capital expenditures, and FCF:

Here, the story was more mixed... though the overall trend is positive. After eight quarters of negative FCF, this metric turned positive (thanks largely to the tailwind of the pandemic lockdowns) in the first quarter of 2020. And from that point, Netflix generated $2.6 billion of FCF over nine quarters.

Lastly, Netflix's net debt was modest – and hadn't risen in the previous two and a half years. Take a look:

Overall, this is a very strong financial picture for Netflix.

Turning to Meta, its stock hit bottom six months later after it reported disappointing third-quarter 2022 earnings on October 26 of that year – the stock reached a low of $88.09 per share on November 4. So let's see what the company's financials looked like at the time...

The income statement showed flat revenues over the previous year and a steep decline in profits over the previous two years (down 52% year over year in the recent quarter), but the company was still highly profitable – having earned $4.4 billion in that quarter:

Meanwhile, Meta's cash-flow statement had showed declining operating cash flow and capex doubling over the previous year. That resulted in FCF plunging to almost zero – but it wasn't negative. Take a look:

Lastly, the balance sheet was pristine, with a strong net cash position, though it had declined from a peak of $52.1 billion to $15.3 billion in the most recent quarter (note that this chart looks similar to the Netflix one, but that was measuring net debt):

Overall, Meta's financials in late 2022 weren't quite as strong as Netflix's six months earlier... but they were still solid.

So when we go back and look at Intel's financials – which I showed in Friday's e-mail – and compare them to Netflix's and Meta's financials in 2022, we can see that they are basically polar opposites.

In Friday's e-mail, I wrote:

I've sometimes found incredible opportunities among the most hated, beaten-down stocks... but generally only when many (ideally all) of the following conditions are true:

• Modest (rather than catastrophic) declines in revenue and net income...
• Even if it's declining, positive (or at least not too negative) free cash flow (operating cash flow minus capital expenditures, or "capex")...
• A decent balance sheet, which gives a company time to right itself...
• A good sector (a reasonably competitive environment in which other companies are doing well)...
• And new management.

We can see that Netflix and Meta in 2022 easily passed the first of my three conditions... while Intel today fails all three.

As such, I'm not interested in Intel's stock.

2) I'll wrap up today with an important lesson...

One of the most important skills investors today need to have is the ability to quickly look at a stock that seems promising, but quickly decide not to spend any more time on it.

Twenty-five years ago when I started my professional investing career, finding a good idea to research was an important part of the investment process.

An equally important part was tracking down information – even basic things like annual reports. (I often had to call companies and ask them to mail information to me!)

Today, the exact opposite is true.

Every day, I see a dozen interesting ideas... And within minutes, I can pull up massive amounts of information on them. It's like drinking from a fire hose.

So to avoid drowning, you need to have good filters.

Specifically, you need to have an investment strategy that defines what you're looking for, such that you can quickly discard 99% of the ideas that hit your radar screen and focus your energies on researching the 1% in your sweet spot that might become profitable investments.

I had high hopes that Intel might be this year's "Netflix and Meta in 2022." But a five-minute look at its financials led me to conclude that it's not... so I'm moving on.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.