Intel’s investors shouldn’t have been surprised

Intel’s rocky earnings report wiped billions off its market cap.

Small chips, big costs
The product that gave Silicon Valley its name is hot again. Investors have piled into semiconductor stocks over the last five years, tripling value of the benchmark Philadelphia Stock Exchange Semiconductor Index.

But last week, Intel’s market cap dropped $26 billion in response to its lackluster earnings report. It was a reminder of the challenges facing the country’s largest chipmaker—and the very high cost of counteracting the ongoing global chip shortage.

On Friday, Intel said it plans to spend a massive $28 billion for new plants and equipment in 2022. That spending will cut into profit because revenue will be about flat from 2021. As the company’s stock fell, Intel Chief Executive Officer Pat Gelsinger told Bloomberg last week he expected some short-term pain in his quest to regain Intel’s manufacturing dominance. “I’m not surprised by the reaction to the results,” Gelsinger said.

Were investors right to be shocked? You could argue that Gelsinger’s $28 billion budget, roughly twice what Intel typically spends, was an unprecedented increase. But the CEO has clearly and repeatedly said that he was not only going to fix his own manufacturing, he’s going to take on Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. in the business of outsourced chip production.

Those Asia-based companies have already unveiled multi-year spending plans that reach into the hundreds of billions. Compared with them, Intel’s 2022 splurge is just table stakes.

By this point, it’s clear to anyone paying attention that chipmaking is a gargantuan undertaking. Even those not versed in the esoteric nature of the industry have been given a lesson by the pandemic and the shortages of electronic components now hurting growth across the economy.

Despite those costs, Intel is arguing that its outlook is sunny. And for the time being, that’s true. The company is still pulling in plenty of cash—posting revenue that’ll probably keep it at the top of the chip industry this year. And there’s no immediate alternative for the hundreds of millions of processors that Intel’s plants still produce.

But Gelsinger’s investors are demanding more, and have extremely high standards for the company. Gelsinger’s prediction of gross margin is in the 51 to 53% range for the next few years. That’s less than the 60% or higher that’s traditional for Intel, but is still a margin that would prompt a victory lap from most manufacturing companies. For example, General Motor Corp.’s gross margin struggles to climb above 20%. And TSMC has only just crept above 50%.

Meanwhile, even though Intel has lost market share, it’s still above 80% in many of the various segments of the computer processor market. But in servers, for example, that’s down from more than 99% just a couple of years ago.

Perhaps last week’s selloff has flushed out investors who either don’t believe or who can’t stomach the ride. It’s clear that Intel’s path back to glory will be rocky, if it ever gets there at all. Going forward, Gelsinger will need to maintain his unflagging optimism: “We are on track for a great future,’’ he said. Bloomberg