Summary
- Intel updated the market with financial targets through 2026.
- The company forecasts negative cash flows in 2022 and not returning to positive cash flows until 2025.
- The chip giant is falling further behind the aggressive capex spending of TSM.
- The stock remains untouchable as the company heads down a scary path of heavy spending with no guaranteed positive returns.
At the Investor Meeting on February 17, Intel(INTC) outlined a scary path for the chip giant to hopefully regain prominence. The chip giant must spend aggressively on their foundry plans leading to a future cash crunch from paying the large dividend. My investment thesis remains Bearish on the stock due to excessive spending on fabs which don't even guarantee Intel being competitive withTSM(TSM).
Massive Spending
Intel has already discussed spending heavily on fabs and outlined an updated integrated device manufacturing strategy, or IDM 2.0, so a high level of spending going forward isn't a surprise. After all, the chip giant just announced a major complex in Ohio to home multiple fabs costing up to $20 billion with the shells in place to ultimately expand to a total of eight fabs.
The problem for investors is that Intel had never put these plans to paper. The weak stock market isn't helping, but the stock is down to yearly lows with the market being caught off guard on the actual length of the weak financials and the lack of guarantees that Intel rebounds.
Along with Q4'21 earnings in January, Intel had guided to Q1'22 gross margins of 52%, but now the company is guiding to those margins through the end of 2024. The chip giant has 3 years of major margin pain ahead when the company previously had gross margins topping 60%.
Source: Intel Investor Meeting '22
The numbers are expected to be so weak that Intel is now forecasting negative cash flows for this year. The company did guide to EPS topping analyst targets at $3.50 per share in 2022, but Intel is ramping up capital spending at an alarming rate to $27 billion. The chip giant will quickly wipe out around $25 to $26 billion in operating cash flows, though these cash flows are down from $30 billion in 2021.
A lot of Intel investors probably thought the company was just a few years away from reclaiming the leadership position back from the combination ofAMD(AMD) and TSM, but the path outlined by CEO Pat Gelsinger is one of a long and scary one of heavy spending.
AMD will actually produce higher gross margins in 2022 and beyond. Intel forecasts flat cash flows for both 2023 and 2024 and operating margins of only 21% at the lows. The company just reported a tough year where the operating margin was still a rather strong 33%.
Source: Intel Investor Meeting '22
The biggest issue is that Intel isn't guaranteed to generate the long-term, double digit growth in 2025 and beyond. The IDM 2.0 strategy isn't guaranteed to work with chip competitors likely uninterested in partnering with chip production from a competitor.
The company isn't going to generate the 10% revenue growth rates without this strategy working. All while, Intel now spends ~$6 billion in annual dividend payments. One needs to consider the cash outflows over the next 3 years will be as follows:
- 2022 - ($7+) billion
- 2023 - ($6) billion
- 2024 - ($6) billion
In essence, Intel will see cash flow out to the tune of nearly $20 billion through 2024. Due to years of massive dividend and stock buybacks, the chip giant doesn't have the greatest balance sheet with net debt of nearly $10 billion already.
Data by YCharts
The company is still proposing to sell a position in their Mobileye division while spending~$5.4 billion on Tower Semi.(TSEM). In essence, Intel is trading an investment in auto technology of the future for older manufacturing equipment. The trade off doesn't add up here, other than the chip giant diving further into the manufacturing business and moving further away from a focus on chip design.
Not Enough
Intel definitely needs to spend in order to catch up with sector leaders that have captured market share in the past few years. The issue is whether this boosted spending level is even enough to keep up.
Over the last few years, TSM aggressively ramped up spending and has moved far beyond even these higher levels at Intel. TSM just completed a year (not captured on the chart below) where the company spent $31 billion on capex, far exceeding the $20 billion spent by Intel.
Data by YCharts
While investors are possibly alarmed by Intel ramping up capex to $27 billion this year, TSM just announced plans to spend$40 to $44 billion on capex in 2022. The scary part of the investment story is that Intel is spending all this additional capital and the gap with TSM is expanding.
The Taiwan company could outspend Intel by a massive $17 billion. The gap represents more capital than Intel was spending annually just a couple of years ago. Anybody listening to the Investor Meeting might conclude Intel is guaranteed to catch the manufacturing capabilities of TSM, but the pure spending data suggests the chip giant will fall further behind.
Intel could more efficiently spend capital, but those odds don't appear likely.
Takeaway
The key investor takeaway is that Intel is headed down a scary path of aggressive spending that doesn't even catch up with the competition. The company wants to rebuild the foundry outsourcing business, but the chip giant appears unwilling to match the competition due to hitting alarming negative cash flow levels. The stock faces a difficult few years before any signs will emerge of better times ahead warranting an investment in the stock.