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Intel Stock Sinks After Pat Gelsinger Details 4-Year Comeback Plan
CEO Pat Gelsinger believes Intel is the ‘next great growth company,’ but shareholders were skeptical about the detailed comeback plan Gelsinger and other executives provided at the Invel Investor Day meeting, sending the company’s stock down as much as 6.4 percent Friday.
Intel CEO Pat Gelsinger on Thursday laid out a bold and expensive comeback plan that he believes will bring the chipmaker back on top of the semiconductor industry, but shareholders responded harshly the day after, sending the company’s stock price down as much as 6.4 percent Friday.
In a presentation that lasted more than three hours, Gelsinger and other Intel executives detailed how the semiconductor giant will outcompete fabless rivals like AMD and Nvidia as well as manufacturing competitors like TSMC in four years at the company’s Intel Investor Day 2022 meeting on Thursday.
“The Intel turnaround train is leaving the station, and I hope you all get on board. It’s an ambitious goal. But I am confident Intel’s best days are in front of us,” Gelsinger said in his presentation.
The Santa Clara, Calif.-based company plans to reach 10-12 percent annual revenue growth by 2025-2026, Intel’s new CFO, David Zinsner, said. That would mark a new era of major growth for the chipmaker after only growing revenue by 2 percent in 2021, 8 percent in 2020 and 2 percent in 2019. In addition, Intel’s gross margins are expected to reach 54-58 percent in that 2025-2026, with free cash flow representing about 20 percent of annual revenue.
However, Intel is expecting to spend big in the next few years to regain its chip manufacturing prowess, with capital expenditures estimated to reach roughly 35 percent of annual revenue for 2022 and the two years before it goes down to roughly 25 percent in 2025-2026, according to Zinsner. This will bring Intel to a negative cash flow this year in the order of $1 billion to $2 billion, and gross margins are expected to dip to 51-53 percent. Cash flow will then be neutral in 2023 and 2024.
During that period, Intel expects revenue to grow only 1.7 percent in 2022 before reaching a growth rate in the mid-to-high single digits in 2023 and 2024.
“This is absolutely the strategy that will make us successful. There is an investment period to make it successful, but the outcome is significant both in terms of [profit] and in terms of shareholder value creation,” Zinsner said in his closing statement.
The biggest factor that will drive Intel’s capital expenditures higher and gross margins lower over the next few years is the fact that the chipmaker is trying to bring five manufacturing nodes to production over a four-year period. This started with Intel 7, the node previously referred as 10-nanometer Enhanced SuperFin, which went into production with the Alder Lake client CPUs last fall. It will end with Intel 18A, which Gelsinger has said will beat competing chip manufacturers in performance.
Gelsinger announced the node acceleration plan last July as a way to play catch up with chip foundries TSMC and Samsung in leading-edge nodes after Intel fell years behind with its 10nm and 7nm processes.
“We said five nodes in four years, and a bunch of you looked and said, ‘Have you gone nuts? Doesn’t it take two years per node?’ And we in confidence said, ‘Five nodes in four years.’ And we remain on or ahead of schedule against the timelines that we laid out,” he said at the investor meeting.
However, despite the plans outlined by Gelsinger and company, many shareholders were skeptical, which resulted in the company’s stock price declining 5.3 percent by market close Friday. Intel’s stock price closed at $45.04 per share Friday evening after it dipped down to $44.51 earlier in the day, which marked a 52-week low for the company.
Stacy Rasgon, a senior analyst at Bernstein Research, gave Intel an “underperform” rating and set its target price to $40 per share in a note to clients after the presentation. He told CRN that the big concern for investors is that “there’s no quick fix” for the chipmaker’s problems that began before Gelsinger became CEO, which means lower returns for shareholders for the next few years.
“They basically said there’s no free cash flow until 2025. And so even if you believe them, and you say, ‘Well, yeah, 2025 is going to be beautiful,’ like, what’s your rush? It‘s only February of 2022, and I got three years of pain before I can even hope to get anything,” he said.
The other problem, according to Rasgon, is that Intel faces risk in spending a lot of money while facing strong competition from the likes of AMD and others. Rasgon said Intel’s data center guidance indicated that the company would “keep losing share for the next several years,” and he noted that Intel delayed Granite Rapids, a new Xeon CPU it said would provide “unquestioned leadership,” by one year to 2024.
There are also concerns that Intel’s assumptions about the PC market’s growth won’t pan out, he added.
“There’s just a lot of uncertainty that they can execute,” Rasgon said. “I mean, hopefully, they can execute, but who knows? And in the meantime, even if they execute perfectly, I’m still sitting here waiting for three years. What possible reason is there to buy the stock today?”
In a LinkedIn post Friday, Gelsinger reiterated his belief that “Intel is the next great growth company.”
“As we embark on the next era of computing, I believe we have a robust strategy to deliver leadership products across our six business units — not to mention our core strengths in manufacturing, software and security,” he wrote.
One solution provider executive told CRN that Intel is making the right move in significantly expanding its manufacturing investments over the next few years.
“Personally, I just feel confident that they will deliver, that they will implement what they need to implement to be in a better position a few years from now,” said Wallace Santos, CEO of Maingear, a Warren, N.J.-based PC system builder.
Santos said Intel’s integrated device manufacturing model has put the company at an advantage for supply, even when it has faltered in the past with next-generation process nodes.
“They have more control over their supply chain, and it’s good that they can scale up or down,” he said.
Under Gelsinger, Intel has already made changes for the better, according to Santos, who said that the company was very receptive to advice Maingear gave on investing in the community to promote the new 12th-generation Core processors that launched last fall.
That, to him, means even better things in the future.
“They did everything that we talked about, plus more, and the launch was amazing. And that’s a product that’s going to head-to-head with AMD. Imagine they continue doing that, and their next [products] are also leading by two digits plus,” Santos said.