Intel (INTC) investors should be pleased with Pat Gelsinger's willingness to spend aggressively and break with convention to put the company on better long-term footing. But they should also keep in mind that -- as Intel's 2021 guidance drives home -- there's no magic wand for Gelsinger to wave to fix the near-term manufacturing and competitive issues Intel is dealing with.
Six weeks after Gelsinger officially became Intel's CEO, he and his company announced that:
- Intel plans to re-enter the foundry (chip contract manufacturing) market, and will spend about $20 billion on a pair of new Arizona fabs to support the effort.
- Intel plans to step up its use of third-party foundries to manufacture a variety of products, and will rely on TSMC (TSM) to make some of the CPU core chiplets going into advanced processors launching in 2023.
- Intel still plans to launch PC and server CPU platforms -- known as Meteor Lake and Granite Rapids, respectively -- relying on its delayed 7-nanometer (7nm) manufacturing process node in 2023, and will partner with IBM (IBM) on chip manufacturing and packaging R&D.
Here are a few thoughts about the implications of Intel's announcements and its 2021 outlook.
1. Gelsinger Is Quite Willing to Sacrifice Near-Term Profits to Make Long-Term Investments
Along with making the Arizona fab announcements, Intel set a 2021 capex budget of $19 billion to $20 billion -- soundly above 2019 capex of $16.2 billion and 2020 capex of $14.3 billion.
At the same time, with cash flows pressured by both high capex and top-line and margin pressures, Intel is guiding for 2021 free cash flow (FCF) of just $10 billion, down sharply from 2019's $16.9 billion and 2020's $21.1 billion. Likewise, 2021 non-GAAP EPS guidance of $4.55 is below 2019 EPS of $4.87 and 2020 EPS of $5.30.
Markets are for now comfortable with Intel making such giant investments. And making them could ultimately be the right call. But Wall Street will eventually want to see signs of a payoff.
2. Intel Looks Poised to Get a Lot of Domestic Support for Its Manufacturing Push...
With U.S. politicians and regulators increasingly viewing the scale and competitiveness of American chip manufacturing as a national security issue, Intel will almost certainly get meaningful federal subsidies/incentives for its planned fab investments, and perhaps also for its process R&D work.
In addition, Gelsinger disclosed that a slew of high-profile U.S. chip developers, including Qualcomm (QCOM) , Cisco (CSCO) , Microsoft (MSFT) , Amazon.com (AMZN) and Alphabet/Google (GOOG) , support Intel's foundry efforts, albeit without announcing any purchase commitments. It's possible that these companies, all of which currently rely on TSMC and/or Samsung's fabs, might view sending some foundry orders to Intel as a way to gain favor with Uncle Sam. And in the cases of the tech giants, the companies might also establish a quid pro quo with Intel through which they receive discounts on Intel CPUs in exchange for having some of their internally-designed silicon fabbed by Intel.
3. ...But Catching Up to TSMC/Samsung and Landing Orders from Rivals Still Won't Be Easy
By the time that Intel ramps production in 2023 for its 7nm node -- seen as competitive with TSMC's recently-launched 5nm node -- TSMC and Samsung (assuming they make good on their timetables) will have already started volume production for their next-gen 3nm nodes. That of course helps explain why Intel still plans to enlist TSMC's help to launch advanced CPUs in 2023.
Also, it's quite possible that many chip developers that compete against Intel -- think firms such as AMD (AMD) , Nvidia (NVDA) , Broadcom (AVGO) and Marvell Technology (MRVL) -- will be very reluctant to have Intel manufacture their chips. I wouldn't call such deals inconceivable -- Apple (AAPL) , after all, still buys memory chips and displays from Samsung, and Qualcomm is apparently willing to deal with Intel -- but Gelsinger & Co. will undoubtedly have to go the extra mile to put execs at rival companies at ease.
Intel's latest foundry push does look like a more credible one than the one it launched and then aborted during the last decade, and the company's cutting-edge packaging technologies will probably be a draw for some chip developers. But there are still some big hurdles to overcome before Intel's foundry business is in the same league as Samsung's, never mind TSMC's.
4. Chip Equipment Makers Have Good Reason to RejoiceApplied Materials ( AMAT) , KLA ( KLAC) , Lam Research ( LRCX) , ASML ( ASML) and a host of other chip equipment makers are up sharply in Wednesday trading in response to Intel's announcements. These gains are arguably quite justified.
Along with Intel's formal capex and fab disclosures, the company's long-term commitment to investing heavily in both internal manufacturing and its foundry ops is a clear positive for equipment makers, which were already poised to see a banner 2021 thanks to TSMC's aggressive spending and a pickup in DRAM capex. And it's worth noting that some chip equipment stocks still look reasonably-priced.
5. AMD Still Looks Poised to Gain Share in 2021 and 2022
AMD's recently-launched Milan Epyc server CPU line -- the second Epyc line to use TSMC's 7nm node -- should be quite competitive against Intel's soon-to-launch Ice Lake Xeon server CPU line, which is the first Xeon line to use Intel's 10nm node. And by and large, AMD's 7nm Ryzen 5000 desktop and notebook CPUs respectively measure up well against Intel's 10nm Tiger Lake and 14nm Rocket Lake CPU lines.
And looking out into 2022, AMD's rollout of PC and server CPUs relying on TSMC's 5nm node should leave it well-positioned to deal with the launch of Intel's next-gen 10nm PC and server CPU platforms (Alder Lake and Sapphire Rapids, respectively). AMD's first 5nm server CPU line (codenamed Genoa) was recently rumored to scale up to 96 cores -- 50% more than Milan and more than twice what Intel currently offers outside of power-hungry multi-CPU packages.
Intel might be on stronger competitive footing in 2023, as it both ramps 7nm production and leverages one or more advanced TSMC nodes for CPU launches. And the company's R&D execution could very well improve under the leadership of Gelsinger, who seems committed to reversing the brain drain Intel has seen in recent years. But it's far too early to write AMD's obituary, particularly given how well the company has executed the last several years.
6. Intel's Revenue and Gross Margin Guidance Highlights Its Near-Term Challenges
Inclusive of its flash memory business, which is set to be sold to SK Hynix, Intel expects 2021 revenue of $76.5 billion, down from 2020's $77.9 billion. Excluding the flash business, the company expects revenue of $72 billion, which compares with 2020 non-flash revenue of around $73 billion.
Intel does note that industry-wide component shortages will ding its PC CPU sales this year. Nonetheless, in what's generally a boom year for the chip industry, as well as a year for which AMD forecasts ~37% revenue growth, the company's top-line guidance says a lot about the competitive headwinds it's facing both from AMD and a slew of ARM PC and server CPU developers.
Also: Intel guided for a 2021 non-GAAP gross margin (GM) of 56.5%, down from 2020's 57.6% and 2019's 60.1%. Elevated depreciation expenses (due to Intel's aggressive capex) are likely playing a role, and so might a mix shift in the PC market towards consumer notebooks relative to business PCs. But the price pressure caused by a tougher competitive environment also probably has something to do with the outlook.
(Microsoft, Amazon, AMD, Nvidia, Broadcom, Marvell Technology and Apple are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)