Intel: May Unlock Value by Spinning Off Programmable Solutions Stake; Maintain $35 Fair Value

We maintain our $35 fair value estimate for no-moat Intel INTC as the company announced its intention to run its programmable solutions group as a stand-alone business that will report separate segment financial results in 2024 and, more importantly, will be brought to an IPO in the next two to three years. Intel may also bring private investors into the PSG spinoff. The move resembles Intel’s successful spinoff of shares of Mobileye. We like the move for Intel as it will raise capital for the company and narrow its focus on achieving chip manufacturing process leadership. The shares were up about 2% on the news, and we view them as fairly valued.

Intel’s PSG includes the former field-programmable gate array business from Altera, which it acquired for $16.7 billion in 2015. Intel expects to retain a majority stake in PSG, like its ownership of Mobileye, and we still think the company can benefit from revenue synergies with PSG as it incorporates the latter’s technology into artificial intelligence products. That said, Intel conceded that PSG has underperformed under Intel’s leadership, so a spinoff may unlock value for PSG. Sandra Rivera, the head of Intel’s data center and AI group, will become CEO of PSG, while Intel will seek Rivera’s replacement.

Intel disclosed that PSG generated trailing 12-month revenue of $2.9 billion with gross and operating margins well above Intel’s corporate average, although this average is bogged down by the huge slump in PC processor demand. Looking ahead, Intel expects the FPGA market to rise at a high-single-digit rate, while PSG should earn mid-60s gross margins and mid-30s operating margins. These targets appear achievable to us, considering Altera’s growth and earnings profile before the merger.