Why The Trade Recommendation On Intel?
Santa Clara, California based Intel Corporation (NASDAQ:INTC), a
designer and manufacturer of digital technology platforms, a large-cap value
stock and member of the Dow Jones Industrial Average, has a new plan to capture
Intel Corporation, one of the largest chipmakers in the world, has
lagged its peers over the last few years in the development of advanced
Intel’s rival, Advanced Micro Devices, Inc. (AMD), has already
introduced 7nm chips to the market and plans to bring 3nm chips by 2022 through
its business relationship with Taiwan Semiconductor Manufacturing Company
Limited (TSM), which is already using 5nm chips.
Intel is yet to bring 7nm chips to the market, and this delay led Apple,
Inc. (AAPL) to ditch Intel as a supplier of processors for MacBook products
late last year.
The chip giant has lost its luster in recent years, as both Nvidia and
AMD have delivered superior products and eaten away at its market share.
But Intel is certainly outperforming its hipper rivals in 2021. Year-to-date,
the stock is up by 29%, delivering far better returns than both rivals, while
the SOX - the major semiconductor index – is up by only 9%.
The Major Catalysts for This Trade.....
1. A Strategic Plan.....
Pat Gelsinger, the newly appointed Intel CEO joined the company on Feb.
15 and introduced a strategic plan on March 23 to expand the manufacturing
capabilities of the company to bring advanced chips to the market. This is a
step in the right direction.
Intel is planning to invest $20 billion in 2 new manufacturing
facilities in Arizona to expand its foundry services segment. Fabless
chipmakers, or semiconductor companies that design and sell hardware and
semiconductor chips without manufacturing the silicon wafers used in their
products, outsource the fabrication process to a foundry. Intel’s new plants
are trying to capture this business opportunity and according to the recent
announcement, Intel will treat the foundry business as a standalone unit to
Separately, the company confirmed its plans to outsource some of its
manufacturing needs to third-party chipmakers, which could turn out to be a
catalyst for growth in the future. AMD has already seen success with this
"Our past attempts were somewhat half-hearted," Gelsinger said
in a presentation to analysts, as reported by Bloomberg.
This time around, Intel appears fully committed to becoming a major
player in the foundry business. The company will be able to offer manufacturing
capacity in the U.S. and Europe, and customers will be able to make use of
Intel's intellectual-property portfolio, including its x86 cores.
Given Intel's previous failure at getting a foundry business off the
ground, along with its years-long struggles with manufacturing, the push into
offering foundry services may seem unexpected. But given how profitable TSMC
has become, it makes perfect sense.
2. Analysts Positivity.....
Many Wall Street analysts have been questioning Intel’s decision to
manufacture all products internally, which has proved to be inefficient in the
last few years. Using a blended production strategy might help Intel bring
advanced chips to the market more efficiently, which in turn, will boost
Needham’s Quinn Bolton liked the latest developments that the new CEO
Pat Gelsinger has implemented. The new man at the helm laid out Intel’s IDM
(integrated device manufacturer) 2.0 strategy last week.
These include the production of modular tiles using state-of-the-art
process technologies for the company’s client and data center CPUs as well as
the Ponte Vecchio GPU.
“As a result,” said Bolton, “Intel is increasing its engagements with
TSMC, Samsung, GlobalFoundries and UMC.”
As part of the new strategy, Intel will launch a new foundry business,
called Intel Foundry Services (IFS).
Asia is now where the majority of the world's cutting edge foundry
capacity is based, and Bolton says the company launched IFS to “address the
industry's capacity constraints and need for more geographically balanced
IFS will have facilities in the U.S. and Europe. The focus will be on
acquiring commercial customers, as well as finding “unique opportunities in
government and security requirements in the U.S. and E.U.”
Furthermore, Intel is addressing the issues which have delayed the
release of its next-gen 7-nanometer chips. Bolton says the company is “righting
this wrong.” By more than doubling its use of EUV (extreme ultraviolet), it has
now “re-architected and simplified its 7nm process flow.”
The company also gave an update on its earnings projections. Driven by
“continued strength in notebook demand,” Intel anticipates beating its current
1Q21 revenue guidance of $17.5 billion and EPS forecast of $1.10.
To this end, the analyst reiterated a Buy rating on INTC shares along
with a $74 price target.
3. Growth In The Adoption Of Cloud Computing Services.....
The growth in the adoption of cloud computing services accelerated as a
result of the virus-induced recession that led to secular growth in the work
from home movement. This presents Intel with a good opportunity to grow its
Data centers are under pressure to improve the efficiency of their
servers to cater to the strong demand for cloud computing, and this can only be
achieved by using advanced chips. Intel, as one of the leading chipmakers in
the world, is well-positioned to benefit from this macroeconomic development.
4. Strong Presence.....
Intel’s strong presence in the personal computer chip market will also
be a catalyst for growth. According to data from Gartner Research, worldwide PC
shipments clocked in at 275 million units in 2020, growing 4.8% year-on-year.
This was the highest annual growth rate seen since 2010, and the increased
adoption of remote working played an important role in the growth of PC sales
Many large-scale employers including Twitter, Inc., Snap Inc., and
Alphabet Inc. have introduced plans to allow remote working in the long run,
which is likely to keep PC sales at an elevated level in the next couple of
years. This is good news for Intel.
Intel's core business of manufacturing PC and server chips is highly
profitable, even with its manufacturing missteps. The company generated $20
billion of revenue, a gross margin of 56.8%, an operating margin of 29.5%, and
net income of $5.9 billion in the fourth quarter of 2020. Intel is still a cash
In the past, it made little sense to use manufacturing capacity to make
chips for third parties when it was more lucrative to use that capacity for its
own chips. But things have changed. Intel's profits are impressive, but so are
foundry market leader TSMC's.
If Intel succeeds in becoming a major provider of foundry services,
margin could potentially improve, given how profitable TSMC has become. Intel
faces a lot of challenges: Its manufacturing difficulties remain, competitors
may not want to turn to Intel for manufacturing, and it will take huge
investments to overcome the manufacturing lead that TSMC has built. But the
foundry business could be very profitable for Intel in the long run if
everything goes right.