Stock: Intel (INTC)
Stock Rating: HOLD
Price Target: N/A
Market Price: $47.05
Research Publication Date: 11/26/20
We believe that things will remain the same at least in the interim until the company transitions its Chandler, AZ fab into large scale production. The transition to 10nm came way too late, and its still lagging competitors like Taiwan Semiconductor Manufacturing (TSM) who continue to manufacture chips on behalf of AMD and NVIDIA.
Intel’s 10nm Transition Buys Some Time
However, in the immediate near-term, Intel announced the Q4’20 transition to Tiger Lake, which is a 10nm process that’s going to run on Intel’s latest architecture. We believe Intel’s performance on an IPC basis will likely exceed expectations, though it still has a steep hill to climb in changing consumer attitudes towards more competitive parts like AMD’s Zen 3 platform. We also have reason to believe that in the immediate near term, the price comparison war will still favor AMD as shareholders advocate for more revenue growth and market share gains, as opposed to gross margin expansion, though investors in AMD can anticipate both outcomes.
The argument among technology industry experts is not that
Intel’s technology is necessarily inferior in terms of chip design, but manufacturing
process is a real limiting factor when compared to TSMC’s process. It is
unlikely that Intel will leapfrog TSMC’s continuing advantage in the space. This
has caused problems for Intel, and its why the share price has continued to
remain so stagnant over the past 12-months.
AMD alluded to Zen 4’s arrival, and its anticipated that in 2022 a 5nm Zen chip will reach consumer markets. By then, Intel will continue to optimize its process and ramp volume production for 7nm chips for an eventual 2023 release according to its roadmap. So, already AMD will continue to reap a density advantage, as they continue to package more cores, and memory into its next generation chip.
We think investors have already anticipated this outcome, which is why the stock price is so stagnant. Under Bob Swan’s leadership the company has done a lot to generate near-term windfalls in the form of divestitures and buybacks. Intel has continued to spinoff business units that are sort of like Frankenstein’s twin brother with the spinoff of its NAND business to SK Hynix for $9B, and other divestitures like the smartphone modem business, which was sold to Apple.
We think Intel is making the right strategic steps in
reducing the scope of the business, so they can redouble their efforts in
scaling up more advanced manufacturing processes beyond 14nm. By narrowing management’s
focus on its core competency of chip manufacturing and CPU design, Intel will
likely return to relevance at some point in the future.
What is a Realistic Timeframe for Intel’s Recovery?
But, this return to relevance among consumers is unlikely to
occur until a 2024-2026 timeframe, which means that investors shopping for a
discount due to a deep value thesis should still steer clear, as the fundamental
backdrop of weakening y/y sales comps is driven by changing consumer attitudes,
and continuing media coverage that favors AMD over Intel.
Though obviously, we have seen this story before when AMD
led with Athlon X2 chips in 2004-2006. But the briefness of that winning streak
differs from where we are today. AMD has continued to release competitive parts
since the release of its Ryzen Series or from the beginning of Zen, where AMD’s
presence in the CPU space was near non-existent under Rory Reads leadership
following the unsuccessful comparison wars between the Phenom series vs. Core
i7, where eventually AMD fell behind due to a lagging manufacturing process, and
eventually lost a catastrophic amount of market share.
We are obviously in a different environment, where AMD completely exited the foundry business altogether, and by happenstance was able to piggyback on an emerging alternative via TSMC. The reason TSMC was able to advance its node advantage over the past decade was driven primarily by Nvidia’s emphasis on being a chip designer and delegating manufacturing to TSMC. Because Nvidia needed a performance advantage vs. AMD they continued to put pressure on TSMC to ramp up investment to maintain a node advantage to snuff out GlobalFoundries.
The irony of the situation is that AMD soon recognize the
flaw with their strategy and ended up piggybacking on the same fab with Nvidia
with both companies purchasing large volumes of wafers thus providing the
necessary funding for TSMC to continue advancing their fabs. As a result, AMD
and Nvidia have managed to snuff out Intel’s biggest competitive advantage,
which was their manufacturing process.
How the Heck Did Intel Get Here?
Unfortunately, under Bryan Krzanich’s leadership, the company leveraged free cash flow through the form of expensive acquisitions and entrance into a number of businesses that never managed to generate significant shareholder accretion. Intel spent more time in the past decade optimizing pre-existing fabs rather than advancing its fabs to maintain a 2-year refresh cadence, where Krzanich would continue to emphasize the scientific boundaries of pushing process nodes to 5nm and beyond. In other words, the over emphasis of diversifying the product portfolio to include more PC parts, and the absence of steep investment into fabs resulted in what we now label as the Krzanich Titanic. And as a consequence, shareholders are saddled with a bunch of businesses that Bob Swan has to divest in order to return to competitiveness in its core business.
Its why we then have to label Bob Swan – Black Swan, because
we honestly do not expect any news to be good news in the near term. When it
pertains to the semiconductor business, performance is everything, and without
strong enough performance numbers to keep pace… Intel is then faced with two
options. Join AMD and NVIDIA by outsourcing to TSMC or return to leadership in
the space.
Final thoughts
We hope Intel returns to leadership. But we do not anticipate this outcome to happen anytime soon, and its why investors shopping for a discount could easily be misled into thinking that this will be a quick transition. It will not be a quick transition, and the timeframe for Intel regaining market share on the basis of performance will not happen for another five years given the differences in the technology roadmap unless if Intel overdelivers.
However, we are not holding out hope for this outcome in the
near-term, as Intel has spent the better part of five years explaining why they
couldn’t transition to 10nm. We’ve gone through a 3-year delay and ended up
with something like Broadwell+++++, which is something nobody anticipated, much
less investors. As such, we are not anticipating meaningful shareholder returns
until Intel regains its dominance in the space, and that is not going to happen
for a while.
Therefore we initiate coverage on Intel at HOLD and will publish our financial model and price target at a later date.
Disclosure: Cho Research was not compensated by Apple to publish “Buy Apple (AAPL) On The Dip Because We’re Going Back Up”Though Cho Research does use the research dollars it generates from other clients of our research service to fund market research
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