Intel Corp. is playing the long game by hedging its $150 billion dollar pivot into foundry manufacturing on a favorable geopolitical climate, as well as the highly-anticipated explosion of AI technology into every facet of life.
But steady returns on the company’s costly changes are still years – if not decades – in the making, and analysts are split over whether Intel’s lofty plans will come to fruition.
Returns on Intel’s record-breaking investments will depend on demand for chips in sectors ranging from military products to hearing aids, according to remarks made by CEO Patrick Gelsinger on Tuesday morning. These ambitious plans have boosted expectations ahead of Intel’s third-quarter earnings, but some analysts view restrictive immigration policy and labor shortages, as well as Intel’s past failures in foundry, as potential headwinds for the high-stakes pivot.
“If you’re going to grade us on the 90-day shot clock, okay, we’re gonna be a failure,” said Gelsinger at an event hosted by the Economic Club of New York. “Because it’s a five year journey. It’s that hard to rebuild and shift industries.”
Gelsinger’s timeline is in reference to Intel’s construction of factories in Ohio – which would become the largest facility in the country – and Arizona. The move increased Intel’s capital investments three-fold and marks a dramatic shift into delivering products for other semiconductor companies instead of innovating its own.
Some analysts are encouraged by the fact that the appetite for domestic semiconductor production has been strong for well over a year, and has only intensified in recent months as geopolitical tensions mount. At the same time that Gelsinger made his remarks, President Joe Biden added more restrictions to semiconductor shipments to China.
“There has been a lot of focus on geographically diverse manufacturing outside of China, so the US investments have been very welcomed,” said Cody Acree after the remarks, equity research analyst for Benchmark investments.
Gelspringer called for immigration reform to ensure that Intel could adequately staff the new facilities, highlighting that a favorable international political climate could be undermined by polarizing immigration policy domestically if skilled workers are not allowed to come to the US to work. One of Intels top competitors, Taiwan Semiconductor Manufacturing Co learned that the hard way, when a limited labor supply delayed the launch of a new factory in Arizona.
Photo by Slejven Djurakovic on Unsplash
Other analysts are concerned about Intel’s less than flawless past, with several high-profile manufacturing mishaps in the last decade alone.
“The issue is how quickly can Intel ramp manufacturing and will they be able to manufacture at yields required for leading edge technologies?” said Ruben Roy, managing director of equity research at investment banking company Stifel. “To date, they haven’t proven that they can manufacture on a foundry basis for other customers.”
Roy was optimistic about the company’s performance in the near term, but was less confident about the feasibility of Gelsinger’s long term plan.
Intel’s jump into foundry manufacturing comes on the heels of a concerning five-year decline in market performance, as the result of significant manufacturing missteps in 2020 and a steep drop-off in PC sales. The company’s newfound strategy and leadership has heralded a recent surge in earnings per share and surpassed expectations for revenue, but still continues to lose market share to its competition. Broadcom is up 107.31%, Advanced Micro Devices is up 83.68% and Nvidia is up a whopping 287.74% after its flashy IPO earlier this year.
Returns on Intel’s massive investments are far from guaranteed but Gelsinger is not deterred.
“The line between bold and crazy on Wall Street is a thin one,” said Gelsinger. “And most of you aren’t sure which side of the line I sit on.”