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In a bid to reverse its fortunes, Intel Corporation (INTC.US) is reportedly preparing a self-rescue plan, with Citigroup suggesting that the company should exit the foundry business. The manufacturing or contract manufacturing issues at the company, led by CEO Pat Gelsinger, have emerged as a red flag in its efforts to turn the tide.
Despite the management’s bet on the company’s future in the foundry business, Citigroup believes that Intel should exit while it still can. In a report to clients, Citigroup analyst Christopher Danely stated, While we believe Intel’s CPU manufacturing business is proceeding as planned, we still think, for the sake of shareholders’ best interests, the company should exit the foundry business. Danely rates Intel as neutral with a target price of $25.
Manufacturing Woes and the Proposed Solution
Intel’s problems in manufacturing or foundry operations have become a focal point in the company’s struggle to regain its competitive edge. The company has been grappling with challenges that have raised concerns among investors and analysts alike. Gelsinger is set to propose a cost-cutting plan at the board meeting scheduled for mid-September.
Sources familiar with the matter reveal that the proposed plan includes divesting non-essential businesses but does not involve splitting the company or selling its chip manufacturing plants. This move is seen as a strategic step to streamline operations and focus on core strengths.
Strategic Shift to Advanced Technologies
During a Citigroup technology conference on Wednesday, Intel’s Chief Financial Officer David Zinsner announced that the company will skip the 20A process node and instead adopt the more advanced 18A process. This strategic shift is aimed at reducing costs and staying competitive in the market. Danely estimates that this move will save Intel an additional $5 billion, bringing the total savings to $100 billion in capital expenditure and $40 billion in operating costs. However, this is still behind industry leader Taiwan Semiconductor Manufacturing Company (TSM.US), which produces chips for companies like NVIDIA (NVDA.US), Apple (AAPL.US), and AMD (AMD.US).
Danely predicts, We continue to expect Intel to reach parity with TSM in customer CPU manufacturing by the first half of 2025, but the management acknowledges that achieving parity in the data center market may take longer.
Financial Impact and Future Projections
Zinsner indicated at the conference that the company should see meaningful foundry revenue from its advanced packaging services next year. However, meaningful wafer foundry revenue is not expected until 2027. Consequently, Danely believes that the foundry business will dilute the company’s profit margins next year.
The proposed self-rescue plan comes as Intel faces intense competition from TSM, which has been setting the pace in the semiconductor industry. Intel’s decision to skip the 20A process and move directly to 18A is a bold step, but it remains to be seen if this will be enough to close the gap with TSM.
Conclusion
Intel’s self-rescue plan and Citigroup’s suggestion to exit the foundry business highlight the challenges the company is facing. While the management is confident in its strategy to focus on CPU manufacturing and advanced technologies, the road ahead is fraught with uncertainties. The success of Intel’s turnaround will depend on its ability to execute its plans effectively and stay ahead in an increasingly competitive market.
As Gelsinger prepares to present the self-rescue plan to the board, all eyes will be on Intel’s next moves and how they will impact the company’s future in the semiconductor industry. The coming months will be crucial as Intel seeks to redefine its strategy and navigate the challenges ahead.
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