Intel Stock Drops as Foundry Flounders

Published on

Once a revered U.S. chipmaker, Intel (NASDAQ:INTC) is now the target of widespread skepticism and occasionally even mockery. Pouring capital into a chip-foundry division was supposed to set Intel apart from rivals like Advanced Micro Devices (NASDAQ:AMD), but new data indicates that future-proofing a business can come with hefty costs.

Taiwan Semiconductor (NYSE:TSM) also has a foundry business. However, the U.S. government wants to promote domestic processor production and is willing to provide financial backing to Intel. That’s bullish for Intel stock in the long run, but short-term hiccups are bound to occur as the company spends money today to plot a comeback in the coming quarters.

The financial market tends to be forward-looking, no doubt, but it’s also highly reactive to immediate headline shocks. Ultimately, there may be a compelling buying opportunity if INTC falls far enough, but be prepared for pain points while the chipmaker struggles with growing pains stemming from its its foundry ambitions.

Asking shortsighted traders to take a long view

Before addressing the bombshell disclosure that tanked Intel stock in after-hours trading on Tuesday, it’s worthwhile to discuss the company’s announcement of a “financial framework” for its foundry division. Intel expects this business unit, formally called Intel Foundry, to “achieve profitable growth” and “[o]perating margin improvement” at some point.

As far as “profitable growth” goes, the market seems to have an “I’ll believe it when I see it” stance for the moment. It’s hard to blame investors for being skeptical, especially when Intel is preparing the market for immediate pain with the statement, “Intel Foundry’s operating losses are expected to peak in 2024.”

That’s like saying, “Things will get better, but not right now.”

Stock traders aren’t known for being extremely patient, and at a time when NVIDIA (NASDAQ:NVDA) continues to grow at a breakneck pace, the market isn’t going to sit around and wait for Intel’s losses to “peak.”

Furthermore, the company is evidently “driving for Intel Foundry to achieve break-even operating margins midway between now and the end of 2030.” Again, Intel is basically asking investors to be very patient and forgiving. That’s a tall order when the market has a lightning-quick attention span and a tendency to focus on shiny objects instead of slow-and-steady improvement.

On the other hand, holding INTC stock for the long haul could pay off big time. Intel hopes to achieve 40% non-GAAP gross margins and 30% non-GAAP operating margins for Intel Foundry by the end of 2030. To get there, the company will deploy its foundry in pursuit of “manufacturing a larger percentage of Intel’s products.” It’s a worthwhile endeavor, if not an easy one.

Intel’s floundering foundry

There’s nothing inherently wrong with Intel eyeing ambitious goals for its chip-foundry unit. Unfortunately, it looks like the company’s recent financials aren’t inspiring confidence in wary investors.

According to still-fresh disclosures, Intel Foundry’s sales totaled $18.9 billion in 2023. If that sounds impressive at first glance, consider that the division’s 2022 sales totaled $27.5 billion.

That’s not a positive sign for investors hoping to see immediate results from Intel CEO Pat Gelsinger’s transformation efforts. Focusing on Intel Foundry and producing chips for artificial-intelligence (AI) applications are part of Gelsinger’s comeback strategy.

Alas, Intel’s comeback story won’t unfold without difficulty and capital outlays. Gelsinger and the company may deserve kudos for being honest in reporting Intel Foundry’s financial challenges, but sometimes the market will punish full disclosure rather than reward it.

Nonetheless, Gelsinger is evidently determined to disclose the good, the bad and the ugly when it comes to Intel Foundry.

“We believe this transparency and accountability is needed… The required transformation is well underway,” the Intel CEO assured.

Speaking of transparency, Intel admitted that its foundry business incurred an operating loss of $7 billion in 2023. This may be a deal breaker for skeptical investors, as it represents a setback compared to Intel’s $5.2 billion operating loss in 2022.

Your time frame should determine your strategy

Intel Foundry’s widening operating loss may prompt a prolonged sell-off in INTC stock. Consequently, short-term traders might want to stay out of the way and let the sellers control the stock’s price action for a while.

However, if your time frame extends to years instead of days, weeks or months, it’s not a terrible idea to hold your nose and keep Intel shares in your portfolio. Eventually, Gelsinger’s vision of Intel becoming a foundry-business powerhouse could come to fruition. If that happens, Intel stock could potentially reward anyone willing to endure today’s pain with outsized long-term gains.