Intel & # 39; s (NASDAQ 🙂 new CEO, Pat Gelsinger, has an ambitious plan to revive the growth of the largest chip maker in the world. The strategy, which is a mix of in-house manufacturing and outsourcing, comes after years of underperformance that allowed competitors to gain market share.
As he outlined his plan to analysts this week, Gelsinger said that starting in 2023, Intel will rely more on third-party manufacturers to produce some of the most advanced processors. He also announced a $ 20 billion investment to build two new chips. manufacturing facilities in Arizona called Intel Foundry Services (IFS) to make chips designed by other companies.
By doing this, Intel aims to supply the world's largest cloud computing customers, such as Amazon (NASDAQ 🙂 and Microsoft (NASDAQ :), who are now designing more of their own processors and needing foundries to to manufacture. This hybrid model is a winning combination according to Gelsinger, who was named Intel's top executive only two months ago after his stint as CEO at VMware (NYSE :).
“Intel is back. The old Intel is the new Intel, ”he told analysts in a presentation. "We will become market leaders and we will satisfy the new foundry customers as the world needs more semiconductors and we will step into that gap in a powerful and meaningful way."
For Intel investors, the past two years have been quite disappointing. While other semiconductor manufacturers rallied for the explosive demand for new and faster chips, Intel struggled to get its latest products to market on time due to manufacturing challenges.
Its competitors, including Advanced Micro Devices (NASDAQ 🙂 and NVIDIA (NASDAQ :), are design chips built by outsiders, including Taiwan Semiconductor Manufacturing (NYSE 🙂 – a company Intel is trying to imitate with this new business plan.
Mixed Responses
Intel stocks rose only 16% in the past two years, while the benchmark more than doubled. Will the current plan be enough to bridge that gap and make Intel stock a good long-term investment? Analysts have given mixed reactions, given Intel's past missteps and the highly competitive landscape.
Goldman Sachs reiterated its sales rating on the stock, noting that the $ 20 billion to build the new plants could hurt free cash flow and create conflicts of interest with competitors. As Goldman said in a note quoted by CNBC.com:ekenen19459003]
"Even if IFS is set up as a standalone company, separate from core Intel, we think many of the big fabless consumers competing with core Intel will be reluctant to partner with IFS."
However, conditions on the ground are quite fertile for Intel if the company succeeds in carrying out its plans.
Global chip shortages and China's massive investment to become a leader in chip manufacturing have made the industry part of the geopolitical struggle. US President Joseph Biden last month signed an executive order requiring a 100-day review of key supply chains, including semiconductors. He also said he would seek $ 37 billion in funding to help the domestic chip industry increase capacity.
With political and financial backing, demand for chips is likely to remain strong even after the pandemic as people spend more on smartphones, games and connected devices, all of which require chips. According to a note from investment firm Baird, calling Intel a new pick and reiterating its outperform rating on the stock with a target price of $ 85 per share:
"We are currently witnessing perhaps the worst capacity constraints since the late 1990s, as the geopolitical landscape makes it increasingly risky to bet solely on TSM. Intel simply has to perform in the most friendly environment in the past decades for semiconductor manufacturing in the US "
Bottom Line
Intel's new turnaround plan is impressive and provides good reason to be optimistic about this company. But the current level of the stock does not offer much benefit in the short term as investors take a wait-and-see approach. For long-term investors, it is better to wait on the sidelines and look for a better entry point.
