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Intel (INTC) Reportedly Looking to Outsource Chip Production

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Intel (INTC - Free Report) is considering the outsourcing of some of its chip production to manufacturers like Korea-based Samsung Electronics and Taiwan Semiconductor Manufacturing Company, per a report from Bloomberg.  Intel is yet to finalize anything, added the report.

Citing familiar sources, Bloomberg noted that Taiwan Semiconductor’s latest facility in Baoshan is expected to be operational before the end of this year. The new facility, which could have over 8,000 engineers at it research center, could be utilized for Intel’s production.

Both Taiwan Semiconductor and Samsung have refrained from commenting on the matter, added Bloomberg.

However, Bloomberg stated that Intel’s spokesperson made no direct comments on the matter but referred to prior comments made by Intel CEO Bob Swan. Swan is likely to provide investors a detailed strategy regarding the company’s outsourcing plans and efforts to ramp up production technology during the fourth-quarter conference call slated for Jan 21, 2020, noted the report.

Intel Corporation Price and Consensus

 

Intel Corporation Price and Consensus

Intel Corporation price-consensus-chart | Intel Corporation Quote

 

The news follows closely after the chipmaker received a letter from Third Point LLC, which encouraged management to delve into strategic alternatives to enhance performance. Third point LLC is an activist investor fund founded by Daniel S. Loeb.

Intel is one of the most well-known chipmakers in the world with its share accounting for majority of the overall chip market. Of late, the company is facing numerous issues that hampered its performance.

What is Ailing Intel’s Performance?

Intensifying competition in the server, storage and networking markets is a major cause of concern for Intel. Moreover, production delays are persistent overhangs. In July 2020, the company announced production delay in 7 nanometre (nm) process-based chips as it detected a major defect mode in 7 nm process, which caused yield degradation.

Initial production shipments of Intel’s first in house-based 7-nm data center CPU design are now scheduled in the first half of 2023. Further, initial production shipments of first Intel-based 7 nm client CPU are now anticipated in late 2022 or early 2023.

The production delays had been highlighted by Third Point in its letter. The letter further stated that Intel’s delay in the launch of 7 nm chips will put the company way behind its Asia-based peers in the first five years of the current decade.

In contrast, Advanced Micro Devices (AMD - Free Report) is utilizing Taiwan Semiconductor Manufacturing’s 7 nm process technology, which will speed up delivery of advanced 7 nm chips to market.

In the letter, the activist investor firm highlighted NVIDIA’s (NVDA - Free Report) efforts to strengthen its position in the GPU used in AI applications’ domain. Intel’s absence in this domain was concerning, added the activist firm. 

Loeb also pointed out in the letter the current trend witnessed in the semiconductor domain. Of late, tech giants like Apple and Microsoft (MSFT - Free Report) are contemplating on designing chips in-house and leverage manufacturing capacity of East Asia-based manufacturers. This does not bode well for Intel. Intel should find ways to serve its competitors as clients by offering them innovative solutions, stated Loeb.

The hedge fund has also advised Intel to offload “certain failed acquisitions” as well as urgently tackle its human capital management problems.

Intel’s ballooning debt levels are a concern too. As of Sep 26, 2020, the company’s total debt stood at $36.56 billion. Cash and cash equivalents, short-term investments and fixed-income trading asset balance were $18.25 billion.

All this has been reflected in the company’s stock price. In the past year, Intel’s shares have declined 13.3% against the industry’s rally of 35.9%. In comparison, the S&P 500 gained 18.3% over the same time frame.

Currently, Intel carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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