TSM - It Is Too Early To Be Pessimistic On Intel

2023-07-17 06:05:48 ET

Summary

• Intel's bold turnaround plan, which includes the release of Intel 4 fabrication through a Meteor Lake CPU in 2023H2, could bring the company back into the semiconductor game.
• The potential of Intel's plan is monumental, with the company not only mining for gold but also selling shovels needed for mining, indicating a huge opportunity in the fast-growing semiconductor foundry market.
• Despite risks associated with investing in Intel, geopolitical advancements and support from the US and EU for semiconductor fabrication on their borders could significantly benefit Intel, the only Western company capable of competing in advanced semiconductor fabrication.

Intel ( INTC ) is building a factory to produce a shovel. A shovel will inevitably be needed when mining for gold.

The semiconductor industry is arguably in the midst of a gold rush. World's focus on artificial intelligence and vast resources poured into research and development will likely create a strong demand for hardware products, and semiconductors, that make these software revolutions possible. Thus, companies making different semiconductors including AMD ( AMD ), Nvidia ( NVDA ), and Micron ( MU ) have all seen a dramatic rise in their stock prices. Yet, Intel, again, has fallen behind. However, I believe it is too early for investors to give up on Intel. The company's bold turnaround plan is expected to start sometime in 2023H2 with a release of Intel 4 fabrication through a Meteor Lake CPU. So far, the company's progress has been promising with no signs of deterioration. As 5 nodes in 4 years could bring Intel back into the semiconductor game, I believe it is not the right time to give up on Intel prompting a buy rating.

Continued Reiteration of Confidence

Despite some negative views from the market, Intel has, not even once, said that the company's aggressive plan is delayed. Looking at the most recent earnings call , CEO Pat Gelsinger blatantly says that the Meteor Lake on Intel 4 is on track.

Meteor Lake on Intel 4 is ramping production wafer starts today for a second-half product launch

Further, CEO Gelsinger continued to say that the company is on track even regarding Intel 3, a node that comes after Intel 4.

Intel 3 is on track and we highlighted in our recent DCAI webinar, Sierra Forest will begin shipping in the first half of '24, with Granite Rapids shortly thereafter, both on Intel 3.

Finally, for the entirety of the aggressive roadmap, the company said the following:

we remain on track to regain transistor performance and power performance leadership by 2025.

Given these blatant announcements telling investors that Intel is on-track on its turnaround efforts, I believe it is reasonable to argue that the company's most immediate Meteor Lake on Intel 4 is impending in 2023. The turnaround that the company promised has not fallen apart nor has it been delayed. The process simply requires patience. Then, what is the potential for Intel?

Potential

I believe the potential of Intel's aggressive plan to be monumental. As said earlier in the article, Intel will not only be mining for gold, but the company will also sell shovels needed for mining.

Starting with the potential coming from producing the shovel, or foundry services, the opportunity is massive. Looking at a document from SEC , the semiconductor foundry market size has an expected growth of 7.9% CAGR until 2026. The industry is fast-growing, but today, there are only two fabrication players, TSMC ( TSM ) and Samsung ( OTCPK:SSNLF ). As such, Intel's achievement of new fabrications such as Intel 4 and 3 in the near future could allow the market to expand into an oligopoly allowing Intel to compete and reap gains. Intel's Raptor Lake on Intel 7 was already competitive against AMD's consumer side product; a successful launch of Intel 4 and 3 will likely allow the company to compete in the market. (For a more technical breakdown, please refer to this article ).

Intel allowed AMD to take market share in the past few years. I believe this happened because Intel manufactured its own chips. The company, unlike AMD, designed and fabricated its products. Thus, as Intel fell behind in fabrication abilities believing Moore's law was over in the late 2010s, fabless company, AMD, using the most advanced fabrication technology from TSMC could compete against Intel. For example, there was a 15% speed improvement at the same power usage and a 30% power reduction at the same speed as the TSMC moved from N5 to N3 production. Advancements such as this likely enabled AMD's growth while Intel lagged behind. However, with Intel's renewed focus on fabrication technology, naturally, I believe the company's products, CPUs and GPUs, will become significantly more competitive.

Thus, overall, as Intel works to bring back fabrication up-par with its competitors, the company could be selling shovels by making chips for fabless companies while mining for gold with its own semiconductor products creating an immense opportunity.

Boost of Confidence

Despite the potential, there are risks associated with investing in Intel. My bullish thesis heavily relies on the company successfully releasing Meteor Lake with Intel 4 and following nodes without a significant delay. Such a delay, which is fairly common in the semiconductor fabrication industry, could significantly reduce investor confidence and Intel's ability to crack the current market duopoly. Yet, looking at geopolitical advancements, these risks may be limited.

Today, global semiconductor fabrication heavily relies on Taiwan and South Korea. While they are allies of the United States and other Western Nations such as the UK and EU, the current situation creates a geopolitical threat. In the case of a conflict between China and Taiwan or North Korea and South Korea, the global semiconductor supply chain will be exposed to immense risks. Thus, because the semiconductor is tied to the national security interest, re-shoring fabrication capabilities for both the EU and the US is a paramount task leading to the world’s most powerful and influential governments to support manufacturing in their borders, which heavily favors Intel, the only western company capable of competing against Samsung and TSMC in advanced semiconductor fabrication.

Commerce Secretary Gina Raimondo said “I want the United States to be the only country in the world where every company capable of producing leading-edge chips will have a significant R&D and high-volume manufacturing presence” after announcing more details for the CHIPS Act to create a public-private partnership for the nation’s future. Similarly, the EU said that “semiconductors are at the centre of strong geostrategic interests, and of the global technological race. For this reason, the Commission proposed the European Chips Act, which strengthens European competitiveness and resilience in this strategic sector.” Both these governmental agendas are expected to benefit Intel as the company expands its fabrication footprint.

As such, the US and the EU are ready to heavily support semiconductor fabrication on their border, and Intel, the only Western company with the ability to do so, will be the biggest beneficiary of this geopolitical movement creating a strong buffer to a potential risk that the company may face in the future.

Valuations

Intel's current valuation does not reflect the company's future potential.

On the surface, when looking at only 2023 forward price-to-earnings of about 80 , the valuation multiple may seem like it is stretched. However, the company's 2024 price-to-earnings multiple is expected to be about 19 showing a completely different story. Even for the next few years following 2024, analysts are expecting the company's EPS to continue growing lowering the forward valuation multiples. The market, in my opinion, has more doubts than confidence in the company as the turn-around efforts are not seeing material progress due to the nature of the industry. However, given the near-term and long-term potential of Intel as the company sees material progress in its efforts to be competitive, taking advantage of the current low valuation could be beneficial to long-term investors especially when considering the high valuation premiums leading semiconductor companies receive in today's markets.

Summary

Intel has been stagnating in the past. This was likely the result of believing fabrication was insignificant compared to fab-less design. However, as the company attempts to regain leadership through a renewed focus on the fabrication ability by achieving 5 nodes in 4 years, Intel has a massive potential impending. Thus, as the company has continued to reiterate its progress, I believe it is too early to turn pessimistic on the company warranting a buy rating.

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