Stock: Intel (INTC)
Stock Rating: HOLD
Price Target: N/A
Market Price: $57.88
Research Publication Date: 1/19/21
The recent hire of Pat Gelsinger could not have happened at
a better time. We anticipate that Intel’s leadership transition returned some hope
to investors this week, which in turn diminishes some of the risks tied to the
absence of leadership in the foundry space, where recent announcements suggest
that Taiwan Semiconductor Manufacturing (TSM) will transition to a 2nm
manufacturing process by 2026 or so, whereas Samsung (SSNLF) is anticipated to
transition to a 3nm manufacturing process in the same timeframe.
We believe that Pat Gelsinger’s leadership becomes crucial at this point, which should lead to an early start time for more advanced manufacturing processes. At this critical juncture, we would highly encourage Intel to quickly transition, or make an announcement to start the development, construction, and entitlements for a more advanced fab than the current 7nm facility (which will start production in 2022). We believe Intel needs to make this transition quicker than ever before to keep pace with the rapid development of more advanced gates to address sub 5nm capabilities.
Though, we do not have all the answers, we believe that Intel’s emphasis on returning capital to shareholders is detrimental to the needed Capex for a next-gen fab to sustain the return to a normal 2–3-year fab refresh cadence. Of course, some would argue that the use of cash flow to return capital is what is propping the share price, though we anticipate that if Intel were to prioritize fab investments that it would bring investors back to the stock, as we believe Intel’s superior chip designs, along with a hastened return to another fab investment cycle would restore more confidence in the stock than if shareholders were to confront a weakened investment cycle due to the announcement of another accelerated share repurchase plan or ASR.
As we have mentioned in our prior report titled, Intel
Needs to Reach 7nm Production soon if it Wants to Stay in the Race that some
of the prior leadership, i.e. Krzanich and Swan has only resulted in delays at
both the 10nm and 7nm fab rollout. Hence, the arrival of Pat Gelsinger helps
address some of these challenges, as he is much more tech oriented than the two
prior CEOs. It tends to rhyme with what happened at Apple where a C-Suite type almost
imploded the entire company, i.e. John Sculley.
This does not mean that Intel’s recovery will be an overnight
crusade, though we think steps to emphasize the use of cash on tech, and fab
related investments would alleviate some of the largest concerns from some of
its biggest shareholders. Furthermore, it would bring back more excitement to
the company’s culture while diminishing the long-term concerns of lagging tech
on the foundry end.
However, what is limiting our bearishness on Intel is the chip level design, brand, pre-existing OEM relationships and change in leadership. We anticipate that with a more tech-oriented CEO at the helm, the damage can slowly be reversed, and Intel’s chips would still remain competitive assuming a hastened ramp-up to more advanced fab tech and further advancement in chip level design.
That being said, we’ve yet to update our financial model,
but we think expectations heading into the next quarterly earnings report seem
beatable, mainly because of some pull-forward demand for PCs, and the
transition to work-from-home environments which has forced a tech adoption
cycle where even ASP erosion could be offset with volume contribution.
Hence, consensus revenue estimates of $17.49B for FY’20 is above management outlook of $17.4B. We believe that investors are anticipating an earnings surprise, as well. However, what is most important in the quarterly earnings call is the commentary tied to fab investments, and the revenue/expense outlook for FY’21.
In our next equity research update, we will publish our financial model so investors can understand the reasoning for our price target.
Disclosure: Cho Research was not compensated by Apple to publish “Intel’s New CEO Lifts the Tide We Also Expect an Earnings Beat As Well”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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