Intel is making a $20 billion bet on manufacturing semiconductor chips. Yet, investors are spooked that this investment may take longer than expected to pay off.
To keep its competitive edge over companies like Taiwan Semiconductor (TSMC) and Samsung, Intel broke ground on chip factories in Arizona three months ahead of schedule, Intel CEO Pat Gelsinger said on an earnings call with analysts Thursday. But it will likely take three to five years before the company sees any kind of payoff, analysts say.
As a result, investors are starting to reevaluate their expectations.
"I think it will scare some investors because with the new CEO in place and this turnaround plan on paper, I think a shorter payoff period was hoped for," said Logan Purk, senior equity research analyst at Edward Jones.
Intel reported $18.1 billion in revenue, up 5% from this time last year. Wall Street expected $18.24 billion in quarterly revenue and between the miss and concerns over this investment, Intel's stock was down nearly 12% as of close of market on Friday.
The investment coincides with an ongoing chip shortage, which has impacted manufacturers like Intel. Its client computing business, which includes its PCs, was down 2% from the same time last year because of supply chain disruption, Intel says.
"The big issue in semiconductors is there isn't enough capacity to make what the market demands," said Glenn O'Donnell, vice president and research director at Forrester. "They're adding some more customers, but there's not a whole lot of benefit yet. You will see that play out when some of this capacity comes on in 2023."
But investors are unsure about Intel's product roadmap and the company's ability to build a competitive chip factory foundry business, Vijay Rakesh, managing director and senior semiconductor analyst at Mizuho Securities, wrote in an analyst note note. That's because Intel is splitting its focus between building foundries while still keeping up with the latest chip innovation.
"We believe the pivot could become a capital drag, as it is difficult to both win in the foundry market and maintain attractive margins," Rakesh wrote.
Analysts expect the foundry manufacturing business — meaning building chips to order for others which has been the cornerstone of TSMC's business — to be a key pillar of Intel's growth over the next decade if the company successfully develops it.
The longer-term payoff isn't necessarily a sign that Intel is slacking. Chip factory investments just take time and Gelsinger is asking investors to be patient.
"We are repositioning the company for long-term growth, and we are analyzing the investment plans required to achieve our goals and provide attractive long-term results for our shareholders," Gelsinger said on the call.
But three to five years for the investment to pay off is "not Intel being slow. They're moving quickly," Purk said. "It's just a very long, capital intensive process."
The investment in chip factories is also a part of strategic shakeups brought in by Gelsinger since he joined Intel as CEO from VMware earlier this year. Gelsinger has hired several new executives, including former leaders at VMware like Greg Lavender, and aims to change the "adversarial relationship" among Intel's different business units, according to Purk.
"Pat is trying to essentially realign that culture and get on the same page behind that vision and strategy, especially on that foundry business," Purk said.
Got a tip about Intel? Contact this reporter via email at rmchan@insider.com, Signal at 646.376.6106, Telegram at @rosaliechan, or Twitter DM at @rosaliechan17. (PR pitches by email only, please.) Other types of secure messaging available upon request.
