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One year after being named to the job, Intel Chief Executive Pat Gelsinger’s honeymoon with Wall Street is over, and investors are going to need patience for his promised turnaround and a long road ahead.
Since Gelsinger’s much-heralded return to the semiconductor giant in February 2021, Intel’s
INTC,
stock has fallen about 26%, while the S&P 500 Index
SPX,
remains up almost 8% on a year-over-year basis, even with this year’s market downdraft, as inflation and now Russia’s invasion of Ukraine haunt the markets.
Last week, a few days after his one-year anniversary, Gelsinger hosted an all-day analyst meeting, along with the company’s top executives, a meeting that confirmed there is no quick fix to restore Intel to its former leadership role. The comeback plan involves hefty spending on new manufacturing plants and turning some of that capacity into foundries for other chip makers. Seven analysts lowered their price targets, while two raised them, a day after the meeting, resulting in a 5% hit to its shares.
“It’s not something you can fix overnight,” said Kevin Krewell, principal analyst with Tirias Research. “Pat’s in it for the long haul. He is going deep into the Intel pockets to spend now for a return in a few years, and the stock market wasn’t happy. They would rather see faster returns.”
Indeed, Gelsinger, while touting Intel’s “torrid” pace of implementing his plan, which Intel refers to as IDM (integrated device manufacturing) 2.0, he warned it will take more time. “I feel like we’re a bit ahead of schedule where I thought we’d be at the one-year mark since I came back,” Gelsinger said. “But in all humility, we’ve still got a lot of work to do.”
Gelsinger was right on both accounts. Since he returned to the company that he joined “as a pimply-faced 18 year-old-kid,” Gelsinger has orchestrated an impressive amount of important activity, from expanding its existing chip-making plants in New Mexico, Arizona and Malaysia; to deciding to spend $20 billion on two new fabs in Licking County, Ohio; to getting the federal government to buy in on the importance of the semiconductor industry; to seeking to restore the productive parts of Intel’s culture. And those are just a few, not to mention updated product roadmaps and a big embrace of extreme ultraviolet (EUV) lithography to begin to solve its manufacturing issues.
But all these plans come at a very big cost, one that many analysts were not quite prepared for. As Intel laid out its plans, Jeffries and Co. analyst Mark Lipacis estimated it would result in approximately $85 billion in capital spending through 2024.
Stacy Rasgon, an analyst with Bernstein Research, summed it up as free cash flow at essentially zero until 2025. “The next few years look dour, with muted gross margins and spending (on both capex and opex) increasing through 2024, and with free cash flow essentially zero until 2025 as they put in place the massive amounts of capacity needed to support a growth story like this,” he said in a note.
“They have deep enough pockets to do it,” Krewell said. “It’s just going to hit their bottom line to do it.” Intel has to spend to build new factories with state-of-the-art manufacturing equipment, including EUV systems, to help it regain its processor leadership, which it lost to Taiwan Semiconductor Manufacturing Co.
TSM,
Read also: How did Intel lose its Silicon Valley crown?
At the same time, this investment phase is expected to be accompanied by mid- to high single-digit revenue growth, before revenue growth is expected to return in 2025 and 2026 to the 10% to 12% range.
Some analysts, though, were skeptical that Intel would be able to achieve that revenue growth by 2026, which Rasgon estimated would mean Intel would reach about $120 billion in revenue that year. “The growth outlook appears exceedingly bullish,” he noted.
Those estimates also include some major growth in Intel’s young Foundry Services business, which Chris Rolland of Susquehanna Financial Group described as making a “meager” contribution to 2021 of about $900 million. “Management believes it will represent the largest market opportunity within the company, reaching $140 billion TAM [total available market] by 2026,” he wrote. In addition, earlier this month, Intel said it would buy Tower Semiconductor Ltd. for $4.5 billion, as part of its big push to become a larger foundry manufacturing business.
Part of the strategy is to get a much longer life out of the company’s big manufacturing plants, by also using the capacity for customers and extending the depreciation of the factories over a longer life of 20 years.
But in addition to losing its processor leadership, Intel has also lost market share in both PCs and server chips to a revived Advanced Micro Devices Inc.
AMD,
Intel also announced within its new roadmap that one of its new data-center chips, code-named Granite Rapids, would be ready in volume in 2024, not 2023 as previously expected.
Lipacis of Jeffries noted that Intel’s strategy, in normal times, would have been readily accepted by investors. “On the surface, the playbook seems tried and true: invest during the tough times, bank cash in the good times,” he wrote. “During past investment cycles, Intel was investing from a position of strength and pressing a lead. Today it is investing from a position of weakness and trying to catch up. The stakes are higher and the probability of success is lower.”
Indeed, it is going to be a long haul for investors over the next few years, without much in the way of catalysts, or benchmarks to gauge success. But in Gelsinger’s favor, Krewell said, is that he is an engineer’s engineer. He also got CEO experience while he led VMware
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for more than eight years. He is melding his long history with Intel with his experience at VMware to help craft a better culture at Intel.
“In the past, the prestige of working at Intel was pretty high,” Krewell said. Former CEO Andy Grove fostered an aggressive corporate culture of confrontation, where debate was encouraged among executives, but he noted that often, those who spoke the loudest were the ones who were heard, while other ideas were ignored. While Gelsigner said he is returning Intel to many of its “Grovian” values, Krewell said the return of many former executives is also helping put a new spin on that.
“The new Intel has some of the swagger of the old, but with a better outward-looking culture,” Krewell said. “And as other people come back, they have another perspective, that’s why he [Gelsinger] likes the idea of bringing former execs back.”
Clearly the jury is going to be out for a few years on Gelsinger’s impact on Intel and whether or not the company can return to its role as the king of the semiconductor industry. Until then, investors either have to have a lot of faith, or get off the train.
