Intel's gamble: more factories serving competitors' chips

All as easy as drinking a glass of water, then? The reality is more complicated. Beyond technological competition, several experts point out one aspect. Intel, by entering the foundry sector, becomes the rival of the other players in the industry. A scenario in which the moves of TSMC on duty risk becoming a danger for Gelsinger's strategy. 'In general, the point raised,' says Carlo De Luca, head AM at Gamma Capital Markets, 'is valid. Intel's moves may lead 'other foundries to cut capacity availability in favour of Intel itself'. Having said that, however, the US company's idea is based on different levels of technologies in concert with each other: 'from the production process to the architecture of the systems up to the software to realise them'. Thus, 'this is a frontier foundry, designed also and above all for AI, which would allow Intel to get back into the chip manufacturing game, without necessarily competing directly with other players'.

"Not least because," echoes Bob O'Donnell, President and Chief Analyst of TECHnalysis Research, "Intel's direct competition with TSMC, on the one hand, will be modest for a few years"; and, on the other hand, "the work the company does with Taiwan is also relatively small". Consequently: in the short term, 'no major changes in the collaboration between the two are expected'. In the longer term, on the other hand, the Santa Clara company will 'move the advanced processes, which it carries out with TSMC, to its own factories', thus eliminating the problems. In short: the experts do not seem negative about Intel's bet. However, the do-it-yourselfer must still have one fact in mind: in frontier technology, such changes in strategy do not always bring benefits.

Especially, as in the present case, when they require billions in capital expenditure. An example? In order to realise the two factories in Germany, the group has put 30 billion on the plate (Berlin has planned 9.9 billion in subsidies). These are large sums which, should they not have the appropriate return, could impact on the financial structure. 'Undoubtedly,' De Luca resumes, 'disbursements can further weaken the financial situation. For the past three years the company has had a 'decreasing cash flow, going from almost 30 billion in 2021 to 11 billion in 2023'. And this, 'despite the 3 billion cost cut in the last financial year'. That said, 'the company,' O'Donnel resumes, 'takes advantage of the interest in more geographic articulation', also for geopolitical reasons, 'chip production and the government subsidies that come with it'. This is money - not least the possible $10 billion promised by Washington to Intel - which should act as 'a cushion as the company goes through the multi-year expansion process'. Again, however, the investor must be cautious. Not least because, as the company's CEO himself says, promises of subsidies often do not turn into cash in the short term.

So far, some suggestions on foundry, geopolitics and technological development. The saver, however, also looks at the fundamentals. In the last quarter of 2023, Intel's revenue was 15.4 billion (+10% year-on-year). The gross margin, for its part, rose to 48.8% (43.8%). The market, even with the final figures above estimates, reacted negatively. Why? It disappointed the outlook on the first quarter of 2024: 12.2-13.2 billion turnover and gross margin at 44.5%. More generally, it must be said, the company has put weak years behind it. In 2021, turnover was 79 billion. Then, in 2022, it dropped to 63 and, in the last financial year, settled at 54.3 billion. The net profit itself followed a downward parabola: from USD 19.9 billion (2021) it dropped to USD 8 billion (two years ago) to USD 1,675 million in 2023. In short: the numbers describe a struggling business. True! Heavy investments weigh on profitability. In addition, revenues are suffering from the end-market trend (decline in PC sales). Having said that, however, the underlying dynamic remains. Just as it remains that, in the last 12 months, the stock has risen by more than 60%. 'Investors,' explains Piva, 'have evidently been riding the artificial intelligence narrative, especially the generative one. It is a trend that, according to the Bloomberg terminal, has brought the prospective P/e of the stock on 2024 to 34.7. 'It is a value,' De Luca comments in conclusion, 'which, although the situation can always change and it is advisable to also look at other indicators, is higher than the sector average.

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