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After a 57% decline over the past five years, Intel (NASDAQ:INTC) trading prices today reached $19.50. That's close to the company's tangible book value, making the shares look incredibly cheap.
At that rate, it may seem like investors can't afford to lose. But I think there is more to this than meets the eye.
Physical book value
A company's tangible book value is the value of its equity after deducting its intangible assets (such as inventory) and all of its liabilities. And it can be an important metric.
In my opinion, this money is the one that can be collected by liquidating the company's assets and paying its debts. When a stock trades below this level, it may seem that investors cannot afford to lose.
Barron's estimates Intel's net book value at about $19.50 per share. I have that number closer to $19.15, but the difference probably doesn't matter much.
Either way, Intel's price is currently very close to its net book value. That makes it look like it's in deep value territory. But there are two main reasons I think this is clearly the case.
Depreciation
One is that I'm not sure how accurately Intel's accounting reflects the true value of its physical assets. This is because the company recently changed its depreciation method.
When a business invests in equipment or machinery, this appears on its balance sheet as an asset. The value of this decreases to zero over time as it reaches the end of its useful life. This is a depreciation.
As of early 2023, Intel has increased its estimated useful life for some of its devices. As a result, the book value of those assets decreased less than before.
I don't know if that is right or not. But it raises the possibility that the book value of the company's assets may be higher than what the company could realize by selling them.
Termination
Additionally, I don't think Intel will be selling its assets anytime soon. The company is not running out of money and that means there are many opportunities for it to use it to continue designing and making chips.
This makes investors less likely to receive a cash payment above the current share price due to trading in shares below their physical book value. And if this company went bankrupt, I still doubt this will happen.
When a business is in trouble, it is rarely able to realize the full value of its assets without cash. Taking advantage of this opportunity has been a key part of the success of billionaire investor Warren Buffett Berkshire Hathaway.
Even if Intel's depreciation method accurately reflects the economic value of its assets, I doubt this is what they would sell in bankruptcy. That means shareholder protection is limited.
Is the stock too cheap to ignore?
It is rare to find anything other than a bank trading below the value of its tangible assets. And Intel's share price is really struggling because of the company's mistakes.
As this company destroys its competitors I will not tolerate recovery. But I doubt there is any safety in trading stocks below physical book value and I think there are better opportunities elsewhere.
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