Intel's Fabs Aren't Going Anywhere -- Heard on the Street
DOW JONES & COMPANY, INC. 11:12 AM ET 7/27/2020
Symbol Last Price Change | INTC | 50.1571 | -0.4329 (-0.86%) | | TSM | 82.1 | +8.2 (+11.1%) | | QUOTES AS OF 11:13:14 AM ET 07/27/2020 |
Intel's (INTC) manufacturing prowess has taken a beating. But the chip maker is unlikely to get out of the "making" part of the business.
Such speculation is now rampant on Wall Street, following a disastrous second-quarter report that featured largely good numbers but was overshadowed by Intel's(INTC) disclosure of a "defect mode" in the 7-nanometer manufacturing process that it is developing for its next generation of chips. The problem will delay shipping of the first chips made on that process to late 2022 at the earliest -- a year behind the company's original plan. Intel's(INTC) share price slid 16% Friday, with at least six brokers downgrading the stock following the news.
This isn't Intel's(INTC) first such stumble. In fact, the 10-nanometer process that the company is now using to produce its most advanced chips suffered so many delays that rival chip maker Taiwan Semiconductor Manufacturing Co.(TSM) was able to leap ahead. TSMC has already been volume shipping 7-nanometer chips for a year now and will have 5-nanometer chips hitting the market this fall in some 5G smartphones and other devices. The company also said in its own earnings call earlier this month that volume production for 3-nanometer chips is expected by fall of 2022, which could put Intel(INTC) at least two generations behind by that point.
That is a humbling position for the once-undisputed leader in chip manufacturing technology. And it has many thinking Intel(INTC) might be on its way out of the production end of the business -- especially since the company outlined contingency plans that would have it outsourcing production of some of its most advanced chip designs if its own production technology isn't up to snuff by 2023.
Many chip companies already employ what is called a fabless model, where they specialize in design and outsource production. Such a model can lead to higher operating profits and cash flow, given the lack of capital expenditures needed to build, equip and operate fabs. Mark Lipacis of Jefferies said in a note to clients that a fabless Intel(INTC) "would turn into a cash flow and capital return machine." Christopher Rolland of Susquehanna proposed that Intel(INTC) sell its fabs to TSMC, given a "zero-to-no chance of catching/surpassing" the Taiwanese giant.
Both are unlikely outcomes. Intel(INTC) has nine manufacturing facilities around the world, comprising the bulk of its last-reported $58 billion in net property, plant and equipment. That doesn't include all of the intellectual property built up over 50 years of manufacturing semiconductors. The scale of Intel's(INTC) manufacturing operations leave TSMC and Samsung as the only plausible buyers. And given the highly politicized climate around the industry of late, U.S. regulators are unlikely to allow a foreign entity, even from a friendly nation, grab control of the most advanced domestic chip-making facilities.
What's more, Intel's(INTC) continued dominance in its core PC and data center markets suggests manufacturing process isn't everything. Advanced Micro Devices has been shipping 7-nanometer data center chips manufactured by TSMC for a year now, and Intel(INTC) still controlled about 95% of that market in the first quarter of this year, according to Mercury Research. Joseph Moore of Morgan Stanley noted that the performance of Intel's(INTC) 14-nanometer chips has remained competitive with the 7-nanometer chips AMD is selling.
Wes Twigg of KeyBanc Capital says Intel(INTC) can still realize many advantages from producing its own chips, even if it eventually outsources some new ones to get competitive products out the door on time. Intel(INTC), he added, "still sells everything they can make."
Write to Dan Gallagher at dan.gallagher@wsj.com |
