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Investors roast Intel over manufacturing failures, stock sheds $44 billion in value

By Mike Rogoway, oregonlive.com
Published: July 24, 2020, 8:31am

PORTLAND — Intel blindsided investors Thursday with news that it is a year behind schedule developing its next generation of manufacturing technology, the latest in a string of production failures that now have investors questioning whether Intel can carry off its core function.

Intel shares plunged 17% at Friday’s market open, shedding $44 billion in market value. Meanwhile, rival AMD and contract manufacturer Taiwan Semiconductor Manufacturing Co. each jumped 11%.

On Thursday, Intel said it will outsource production to rivals like TSMC if it fails to meet its own targets – a humiliating prospect for a company that once led the industry in production technology. Susquehanna International Group analyst Christopher Rolland, a normally staid observer of the semiconductor market, said Intel needs even more drastic action.

“We believe Intel has zero-to-no chance of catching/ surpassing TSM (AMD partner) … at least for the next half decade, if not … ever,” Rolland wrote in a note to clients. “Intel should negotiate a sale of their fabs and equipment.” (A fab is the chip industry’s term for factory.)

Outsourcing production could profoundly diminish Intel’s profits and its technology development – the company has long linked its roadmap toward inventing new chip architectures with its in-house manufacturing capabilities.

Outsourcing could also have enormous implications in Oregon, where Intel is the state’s largest corporate employer. Intel develops each new generation of chip technology at its Ronler Acres campus in Hillsboro and the company is in the process of expanding its enormous D1X research factory by one-third.

Should Intel actually move to sell its factories, as Rolland proposed, that could remake Oregon’s economy. In addition to being the state’s largest employer, with 20,000 workers in Washington County, Intel spends billions of dollars maintaining and equipping its factories and has a huge network of local suppliers.

But Intel has never given any sign it would consider selling off its core assets and it’s not clear that TSMC or anyone else would want to buy them.

Intel led decades of exponential growth in computing power by keeping its chip upgrades on a steady cadence known as “Moore’s Law.” By consistently shrinking the features on computer chips, Intel and other manufacturers enabled faster, more powerful and energy-efficient microprocessors.

Those regular improvements have become increasingly difficult as the features on chips approach the atomic level, but TSMC appears to have been able to maintain a regular upgrade cycle. Intel has not.

Its latest failure comes after years of delay to Intel’s current generation of 10-nanometer chips as the company worked to overcome high rates of defects. Originally due in 2015, the first Intel 10nm chips didn’t hit the market until the end of 2019.

Intel had maintained that was a one-time lapse, caused by trying to make too many improvements at once. As recently as April, Intel insisted everything was fine with the forthcoming 7nm processors. The company had promised the first of those would be available late next year.

Intel said Thursday that its latest manufacturing problems will only delay the 7nm chips by about six months, but the company also said the chips won’t be on sale until late 2022 or early 2023 – at least a year behind schedule.

“We’re not happy. I’m not pleased with our 7nm process performance,” CEO Bob Swan admitted at the end of an hour-long roasting from Wall Street analysts Thursday.

Bernstein analyst Stacy Rasgon, consistently negative on Intel, said Thursday’s news was the worst he had seen in more than a decade covering the company. He downgraded the company to “Underperform,” essentially a sell rating.

“From here we see things growing increasingly painful as 7nm delays are likely to overshadow anything good they can put forth, while magnifying any negative events, all while they fight an existential conflict with themselves as they attempt to figure a way out of the hole they have dug,” Rasgon told clients.

“While Intel suggested they at least know what the problem is, it certainly doesn’t sound like a fix is forthcoming anytime soon given the magnitude of the delay and Intel’s potential solution, namely, to possibly give up and embrace a much larger outsourcing strategy,” Rasgon wrote.

Outsourcing carries its own risks, he said, as Intel tries to navigate a shift from internal production to working with a contract manufacturer.

Not everyone was so bleak. Weston Twigg, a Portland analyst who follows Intel for KeyBanc Capital Markets, said Intel has already shifted from focusing solely on manufacturing and is better equipped now to work with contractor.

Twigg noted that Intel’s sales grew by 20% last quarter and its third-quarter forecast is above investor expectations. He kept a buy rating on the stock.

Intel “has been investing heavily in product development, which should pay off as compute demand continues to expand into large new markets.”

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