Intel Breaks Out Product and Foundry Reporting

By Patrick Moorhead - April 10, 2024

The Six Five team discusses Intel Breaks Out Product and Foundry Reporting

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Transcript:

Patrick Moorhead: Yeah, so a little background here. Intel is what is called an IDM, an integrated device manufacturer. What that means is it designs parts and it builds parts. And a few years back when Pat Gelsinger announced that he was coming back, before that, there was a lot of discussion about will Intel stay in the chip building business. There was a lot of people who said split it, that would be the best route, just outsource everything to companies like TSMC and Samsung. I thought short term that was a laughable idea because if you’re not using common tools and there’s weakness on the design side, then you’re going to have some big issues. We saw what happened to GlobalFoundries when AMD spun off and the second that AMD was able to better deal GlobalFoundries and went to TSMC and GlobalFoundries got out of the leading edge.

So rewind, Intel is making hundreds of billions of dollars in investment. Some of that is shared investment between private and public, and this re-segmentation was to help the financial community better do comps, which is, let’s separate the design and product company from the chip building and packaging company, and that would allow you to compare the Intel foundry to companies like TSMC and GlobalFoundries and the design company, a better comparison to NVIDIA and AMD and net-net, the market reaction was not positive as demonstrated by the stock price. It was a difficult week. We saw the Dow go down 500 points, biggest loss in a long time, but I want to talk about what happened. There was some sentiment that talked about, first of all, the media coverage was all about this $7 billion loss and the projected losses into the future, and that really influences the retail investors and I think Intel came in, they didn’t reiterate guidance, which I think weighed heavily on the company now.

The company was in the quiet period and there was some… And whether we want to talk about it as being a miscommunication or misunderstanding that Intel CEO Pat Gelsinger walked back some previous commitments on technology and financial timelines around 18A. Okay, so I think my three key messages are A, factually there were no changes to the financial commitments that I’m aware of, and the other thing I think that’s important is to reinforce that the numbers and the guidance were very conservative for Intel. I mean, there’s so many ways that this could be a much bigger business. I think the final thing is even breaking even has the capability to, at least what I’ve been reading and researching is enabling the company to unlock an extra 200 billion in market cap just by breaking even.

Daniel Newman: Yeah, Pat. Well listen, I’m going to make that even simpler for people out there to understand why that is the case. Long story short, Intel because of its IDM strategy is being assessed completely differently. In fact, the fact its manufacturing capabilities are being even valued at possibly negative or zero at best at this point. So if you kind of look at the new reporting structure, what they basically want to say is we have one business that looks like TSMC. We have another business that looks like AMD. Now, again, I’m really oversimplifying that because they’re not the same, but they are. They have a fabless business that buys wafers at market price just the way all these other fabless chip makers do. And then they have a foundry that’s like TSMC that makes chips for other companies. It just so happens they make them for Intel as well.

Both those companies have value, and if they’re creating cash flow driving EBITDA and net income earnings per share, they both have value, but right now they’ve all been locked up inside this one operating set of books. So if all of a sudden they can say, “Hey, look, we’ve got this business that creates billions and billions of dollars of income as a fabless.” There’s value in that. And if you look at the multiples, the forward multiples at companies, whether it’s Marvell, whether it’s Lattice, whether it’s AMD, whether it’s Qualcomm, what they’re able to get versus what Intel’s gotten because Intel’s been blended down and then almost given a negative valuation to the manufacturing part of its business over time. On the other end, you got a business like TSMC that’s also highly valued for what it’s able to offer to the market, and if they can get to break even now, what happens is you can start to value the products part of the business and then you zero out instead of products plus some negative that’s being associated with this manufacturing.

So that’s what’s going on here. It’s going to take some time, and I think the market was somewhat jolted a bit by how long it’s going to take, and even though I think the company’s been very forward about how long it’s going to take, I don’t think people fully digested it and now that they saw just how poorly the foundry has performed in the near term, and again, I want to be very clear, you cannot stand up a foundry with the cost. It is so capital intensive and get to market and start making money very quickly, especially at the leading edge. By the way, there’s a reason no one’s doing this. I mean, this is incredibly capital intensive. You have an entire world that is somewhat got the rug pulled over their eyes about Taiwan in the fact that they do not see any threat to if China was to invade or something, an earthquake, I don’t know, happened in Taiwan and all of a sudden we couldn’t manufacture chips, but that we really need a Western foundry that does the seven and below at scale.

And so Intel has raised its hand and should be given some commendment for they’ve done for the risk they’re taking and the investment that they’re making, and by 2030, what they’re basically saying is this will be a revenue profit generator. Well is a revenue generator now, a profit generator for the company and it can bring returns to investors. I guess the only other thing I’ll say, Pat, and you hit it pretty hard, is that I think that the market needs to give some value but also give some runway to Intel to accomplish what they’re trying to do. I also think long and short, we’re going to need a chip act too. I don’t think the government’s serious about… I don’t think they’re serious enough. I know 52 billion sounds like a lot, but I’m pretty sure there was a line item for a zoo somewhere in Nebraska that got 28 billion in the latest multi trillion dollar budget.

Yes, I’m kidding. Yes, I’m being sarcastic, but we spend more than that on things that have nothing to do with us every single day. We run a trillion dollar deficit a quarter in this country. We spent 52 billion on the most fundamental critical technology that’s going to shape the next multiple decades in the economy and defense and technology leadership. So get it right, US government get it right, world. Intel is doing the right things. It is hard. This is a very hard thing to do, and I do think they’re making the right steps, but if you’re a short-term investor trying to get a return, I don’t think this is going to be a play for a lot of them. It’s going to take some time because this business isn’t going to start making money for probably at least four or five years and-

Patrick Moorhead: My biggest frustration, Dan, was people who really don’t understand how this works. I mean, you have to lay down tens, 20, 50, 100 billion dollar. That’s three to four years before you generate a single cent in revenue. And as a foundry, you have to get into these perpetual nodes that last for 15 years. So yeah, just the ignorance is frustrating.

Daniel Newman: I think it’s a combination of ignorance and fast money, Pat, and I mean right now you can throw a buck into some meme coin in crypto and get 8000% return, or you can put money into a company like Intel that’s building fundamental technology for the world and not only developing it, but also now manufacturing it for other companies that are building fundamental technology for the world. And it might not drive you a return and it hasn’t driven a return. I mean, that’s the truth. You look back and people have worked there 20 years and their options are underwater. I mean, that is the problem that investors have, and so they have to unlock this value, Pat. They have to unlock it.

Patrick Moorhead: Dan, do you want to take this Facebook question?

Daniel Newman: No, I think my answer is no. I think that one is if you’ve listened to Gina Raimondo and you listen… The federal government of the United States sees this technology as fundamental, foundational, and critical. They’ve called the company a national treasure. They actually can’t fail. We have banks too big to fail, and we’ll bail them out when they make bad bets and bad loans. This is not a bad bet. Now, the ability to execute is going to be a question for some time, Pat, but that’s my take. What’s yours?

Patrick Moorhead: Yeah. My take is similar in that there would be a potential if foundry is a massive success, that it gets split off as its own company, and that’s a possibility. I’m very optimistic on what I’m seeing about 18A on the high performance computing, and by the way, that’s PCs, servers, AI data center chips. I need to see some feedback on 14A from the mobile companies because this model will not work without volume and volume comes through mobile, not PCs.

Daniel Newman: That’s a good point. Look at where ARM got its volume. I mean it’s a different-

Patrick Moorhead: Well, it’s foundry economics. But yeah, it depends. It helps on IP, but you can’t operate and notice the plus plus on wafer cost on 14A. They’re saying it’s going to be the best. The only way they get there is to sign up an Apple or a Qualcomm.

Daniel Newman: Yeah, the packaging, though, Pat, we didn’t say much about it, but the packaging capabilities are robust and they’re very innovative on packaging. That’s where they’ve been doing a lot of their winning so far. And the EDA partnerships are really only in their infancy, which is another thing that’s coming, that comes at 18A, right? That’s actually where they flag that on their…

Patrick Moorhead: Yeah. Listen, I love packaging. TSMC, high performance computing, it’s 10% of their revenue. I like it. It’s good for Intel, but they’ve got to hit it on the wafers.

Patrick Moorhead

Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.