By Mackenzie Tatananni
Analysts expect a shake-up to Intel's foundry business on the heels of Pat Gelsinger's dramatic exit. The CEO's sudden retirement has intensified concerns about Intel's chip-making operation, which has been overshadowed by larger competitors like Nvidia.
Intel's stock has plummeted 61% since Gelsinger took the helm in February 2021, according to Dow Jones Market Data. The S&P 500 gained 54% over the same period.
Gelsinger, a 40-year veteran of the company, abruptly retired Dec. 1. Intel announced the change a day later, while lauding Gelsinger's contributions to the global tech industry. The 63-year-old also relinquished his seat on the board of directors. Intel CFO David Zinsner and Michelle Johnston Holthaus, CEO of Intel Products, will lead the company until it finds a permanent successor.
Gelsinger, a former radio technician, joined Intel in 1979. He left in 2009 to head VMware, a California-based cloud computing company. Upon returning to Intel as CEO over a decade later, Gelsinger quickly set in motion a plan to manufacture chips using an internal foundry that would also serve other companies.
However, this gamble proved to be disastrous: The Intel Foundry unit posted a $7 billion operating loss in 2023, a figure that is expected nearly to double this year.
As Intel scrambled to find a foothold, competitors like Nvidia surged ahead. The chip maker has established itself as an industry leader, with a market value more than 30 times as large as Intel's.
In the wake of Gelsinger's departure, Bank of America analysts project a higher likelihood of separation between Intel's products and foundry businesses.
The analysts noted that since 2021 the chip maker has leaned heavily into its "IDM 2.0" strategy -- maintaining its status as an integrated device manufacturer (IDM) while also starting a foundry business to rival competitors.
"However, we continue to question the strategy behind the IDM structure given subscale and declining internal customers, plus inherent conflict of interest in competing against foundry customers," the analysts wrote. Bank of America maintains an Underperform rating and price target of $21 for the stock.
While a split could serve as a breath of fresh air and allow financial and operational independence for both arms, the Chips Act award is contingent on the company maintaining a stake in its foundry business.
The U.S. Department of Commerce granted the company $7.9 billion last week to supercharge semiconductor production and packaging projects in four states. However, conditions include "change of control restrictions" that require Intel to maintain some degree of ownership in the struggling foundry unit.
Even if the Chips Act is overhauled under the Trump administration, the products and foundry businesses alike must come to terms with lasting issues concerning strategy, structure, and competition, the analysts noted.
Reuters reported Tuesday that Gelsinger retired after concerns were raised during a board meeting last week about his sluggish progress toward the company's turnaround, citing people familiar with the matter.
Specialists at Melius Research singled out a lack of momentum with Foundry customers as a possible contributing factor to Gelsinger's exit.
"While the parting of ways may have been described as 'mutual' at the end, we find it hard to believe that Gelsinger would leave if anything important was going really well," analyst Ben Reitzes wrote.
The Foundry unit, for one, is "clearly not ahead of plan" and will likely require government support, Reitzes continued. Melius rates the stock a Hold and maintains a price target of $25.
The company's stock dipped 3.9% to $22.99 in recent trading Tuesday, down 54% this year and on course for its worst year since 1974, according to Dow Jones Market Data.
Gimme Credit analyst Dave Novosel noted that the firm's Bottom 10 list includes Intel.
"While we did not foresee the departure of Mr. Gelsinger, we identified some of the many challenging issues facing the company that led to his removal," Novosel wrote.
Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 03, 2024 10:47 ET (15:47 GMT)
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