Intel's stock could have a positive catalyst on the horizon, but there's a twist

By Emily Bary

Intel's resegmentation event Tuesday could show off the 'soundness' of its design business - but it could also reveal shortcomings in manufacturing, analyst says

Intel Corp.'s business is complex, and the chip maker has been meeting with the investment community this year to better explain various components of it.

The next such event will take place Tuesday, when Intel (INTC) plans to hold a webinar focused on its new segment reporting. The company will "present the vision and financial framework for the Intel Foundry business, including the recast financials and new segment reporting structure aligned with its transition to an internal foundry model," according to a release.

Essentially, the event will provide a better breakout of how Intel's design business is performing, as that financial data will be presented separately from that of Intel's manufacturing business.

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"Overall, we expect the [resegmentation] to be a near-term catalyst as it showcases the financial/operational soundness of [Intel's] design arm" compared with peers that don't have their own foundries, BofA Securities analyst Vivek Arya wrote last week. "However, it could also expose the shortcomings of its sub-scale manufacturing arm, whose success is crucial to the success of the design team."

Arya expects that the event will reveal 50%-plus gross margins and 30%-plus operating margins for Intel's design business. But he also anticipates that the manufacturing operations will be "substantially unprofitable initially." The design business could add nearly $2.80 in earnings per share by next calendar year, but the manufacturing business could be losing more than $1 a share.

Intel is not only making its own chips, but it is also trying to build out a foundry business through which it would manufacture semiconductors for other companies. The company held a foundry-specific event in mid-February.

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Still, Arya has a neutral rating and $50 price objective on Intel shares, writing that the company is "competing against both the best-in-class design houses [Advanced Micro Devices Inc. (AMD) and Nvidia Corp. (NVDA)] and best-in-class foundries [Taiwan Semiconductor Manufacturing Co. (TSM)] with limited resources and limited scale."

UBS's Timothy Arcuri also stayed on the sidelines, writing that he was "taking a slightly more positive view of Intel Foundry's revenue and margin potential ... though our rating remains Neutral given its flagging position in key growth segments like [artificial intelligence]."

He upped his price target on the stock to $50 from $46 but kept a neutral rating.

Morgan Stanley's Joseph Moore noted that Intel "has made the decision to run the foundry business somewhat separately from the chip business - with foundry interacting with the chip business as they would other customers."

The shift could get investors to value Intel more on a sum-of-the-parts basis, he wrote, though investor feedback is "mixed" on that initiative.

"That does create the potential for better valuation, as investors could look at the chip business earning materially more than consensus earnings for the company overall ... and a foundry business with book value that is most of the book value of Intel ... in addition to majority ownership of [autonomous-driving company] Mobileye," he said.

Still, Intel's narrative hinges more on whether Intel is making progress with its turnaround, especially as relates to process-technology leadership, according to Moore. He has an equal-weight rating on the stock.

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-Emily Bary

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04-01-24 1540ET

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