Intel’s (INTC) solid third quarter financial report briefly kept its stock rally alive this past week. But its crucial manufacturing business is far from a turnaround, posing a risk to the company’s share price in the long run, according to several Wall Street analysts.
The storied chipmaker — whose CPUs (central processing units) are used in data centers and consumer electronics like laptops — reported earnings and revenue for the September quarter ahead of analyst expectations on Thursday after the bell. The results showed Intel’s financial position improving after a significant cash infusion following big investments in the company by the US government, SoftBank (9984.T), and Nvidia (NVDA).
The stock climbed as much as 8% in premarket trading Friday before paring gains shortly after the opening bell.
“We understand the desire to claim victory for the embattled company, but this fight is far from over,” wrote Bernstein analyst Stacy Rasgon in a note to investors following the results.
That’s because Intel’s cash-bleeding manufacturing segment — which the company opened up to outside customers in 2021 through the launch of Intel Foundry Services (IFS) — is still far from profitable, and whether it can succeed long-term is unclear.
Intel’s foundry reported its loss narrowed to $2.3 billion on $4.2 billion in revenue for the three months ended Sept. 27, an improvement from the segment’s $5.8 billion loss during the year-ago period. Analysts expect IFS’s loss to rise to $2.5 billion and its revenue to shrink to $4.1 billion in the fourth quarter, per Bloomberg data.
A key issue for the business has been attracting substantial commitments from customers. Rasgon said only $8 million of the foundry’s revenue came from external customers, according to his calculations.
That problem became evident last quarter, when Intel clarified that its latest manufacturing process, 18A, will be used primarily for internal products after failing to attract outside chip designers such as Nvidia and Broadcom (AVGO). Going forward, IFS will try to draw in outside customers with its next-generation manufacturing process, 14A, making the process crucial to the business’s success. But CEO Lip-Bu Tan reiterated in the call with analysts that the company will only add 14A manufacturing capacity when it sees demand from customers.
Tan said on Intel’s post-earnings conference call Thursday that the company is “engaged with potential external customers” and “encouraged by the earlier feedback.”
But Rasgon noted that “14A remains a very long way off.”
The challenges for Intel’s manufacturing business come just as its product business forfeits market share to AMD (AMD). Both dynamics put the stock at risk of losing steam once near-term hype fades, analysts said.
“While Intel is likely to remain an event-driven stock in the near-term, with potential announcements on foundry partners, AI collaborations, new products, etc. fueling optimism, we believe the eventual return to a focus on fundamentals will likely yield headwinds for its share price,” wrote Deutsche Bank analyst Ross Seymore in a note to clients Friday.
Intel has argued that its manufacturing arm is crucial to the US supply chain given that most of the world’s computing chips are made in Taiwan by rival TSMC (TSM). That argument bore fruit when the US government announced it was taking a 9.9% stake in the chipmaker in August.
But others say TSMC’s $165 billion investment in new American factories helps reduce those supply chain risks, complicating Intel’s argument.
“We believe investors think Intel’s merchant foundry business can be profitable, but we don’t, given our belief that Intel’s foundry is years behind TSMC,” Citi analyst Chris Danely said in a research note. Danely has said he believes Intel should divest its third-party manufacturing business.
After years of delays introducing new manufacturing processes, Intel made an ambitious plan under its former CEO Pat Gelsinger to catch up to TSMC and draw in external customers by introducing “five nodes in four years.” Each planned process “node” represented a new generation of chip manufacturing technology.
Intel technician at its Fab 52 manufacturing facility in Arizona. (Credit: Intel)
The plan fell far short of expectations, and Intel shares tanked in 2024. New CEO Tan and his fellow executives have struck a more cautious tone, laying out Intel’s strategy to catch up on manufacturing and AI.
In a call on Thursday afternoon, executives admitted the yields on 18A — the percentage of functioning chips that can be made from a silicon wafer — aren’t as good as they need to be.
Intel CFO David Zinsner said that while yields are “adequate,” they “are not where we need them to be in order to drive the appropriate level of margins.”
Zinsner also said 18A won’t hit peak capacity until “the end of the decade.”
Further complicating things, analysts added that the level of demand for recently launched chips made using 18A, dubbed Panther Lake and Clearwater Forest, is uncertain.
Bank of America analyst Vivek Arya reiterated his Underperform rating on Intel stock Friday, writing, “Importantly, we don’t expect a material improvement in the current unfavorable cost structure for Intel Foundry, given slow internal adoption of 18A node (peak capacity in 2030+) and foundry competition in the US.”
Laura Bratton is a reporter for Yahoo Finance. Follow her on Bluesky @laurabratton.bsky.social. Email her at laura.bratton@yahooinc.com.
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