Intel Faces Major Issues, But a Potential Solution Could Turn Things Around
Intel (NASDAQ: INTC) is grappling with several significant challenges, but one stands out as particularly crucial. Fortunately, according to Northland analyst Gus Richard, who is ranked in the top 3% of Wall Street analysts, there’s a potential solution to this problem that could help turn the company’s fortunes around.
Intel’s Main Problem: Manufacturing and Design Under One Roof
Intel currently operates with two primary business divisions: Products and Manufacturing. The issue, as identified by Richard, is that in advanced semiconductor production, design and manufacturing can no longer coexist under a single roof. The two functions are increasingly separate in the industry and need independent structures to thrive.
Key Insights:
- Design and manufacturing should be split due to the complexity of advanced semiconductor production.
- Neither Intel nor any chipmaker has the volume or revenue to support leading-edge manufacturing on its own.
The Solution: Split the Company and Focus on Key Areas
To address this problem, Richard suggests that Intel should split its manufacturing arm from its products division. This would allow each entity to focus on their respective areas of expertise, potentially boosting efficiency and performance in both segments.
Key Recommendations:
- Manufacturing arm should sell most of its fabs to companies like TSMC, Samsung, or Global Foundries.
- Focus on developing process technology, advanced packaging, and chip implementation for U.S. military needs.
- This approach could help create a foundry ecosystem outside of Taiwan, which would reduce Intel’s dependency on external funding.
Spinning Off Intel Products: A Path to Revitalization
The second part of Richard’s plan involves spinning off Intel Products, which could breathe new life into the company. Selling Intel Products to a company like Broadcom or Qualcomm, which have superior design capabilities, could make Intel’s x86 offerings more competitive against AMD.
Strategic Benefits:
- Broadcom could merge Intel’s x86 IP with its own AI accelerator IP, strengthening Intel’s position in the market.
- The x86 architecture has enduring value and could remain relevant for decades, but more innovation and competition are needed to avoid stagnation.
Navigating the AMD Cross-License Agreement
A potential hurdle for the spin-off of Intel Products is the cross-licensing agreement between Intel and AMD, which allows both companies to use each other’s patents. If Intel is acquired, this agreement could be revoked. However, with AMD’s key 64-bit patents expiring in 2023, Richard believes that multiple x86 suppliers could benefit AMD in the long run by promoting a stronger, multi-sourced x86 ecosystem.
Considerations:
- X86 is a legacy architecture, but reducing competition could speed up its decline.
- With ARM expanding in data centers, a multi-sourced x86 ecosystem could offer a competitive advantage over a fragmented ARM ecosystem.
Analyst Outlook: A Buy Rating with Significant Upside
Richard has rated Intel stock as Outperform (i.e., Buy), with a $28 price target, suggesting that investors could see ~35% gains over the next year if his analysis plays out. This rating comes despite Intel’s challenges and the current market uncertainty.
Current Consensus:
- Richard’s rating: Outperform (Buy) with a $28 price target.
- The broader market is more cautious, with 25 Holds and 5 Sells.
- The average price target stands at $22.69, indicating 9% potential upside.
Intel is facing a critical juncture, but Gus Richard’s solution to split the company and refocus efforts on both manufacturing and product development offers a potential pathway to revitalization. While the market remains neutral on the stock, Richard’s positive outlook presents an opportunity for investors to watch Intel’s next moves closely.