Once a revered U.S. chipmaker, Intel (NASDAQ:INTC) is now the goal of widespread skepticism and infrequently even mockery. Pouring capital right into a chip-foundry division was speculated to set Intel other than rivals like Advanced Micro Devices (NASDAQ:AMD), but recent data indicates that future-proofing a business can include hefty costs.
Taiwan Semiconductor (NYSE:TSM) also has a foundry business. Nevertheless, the U.S. government wants to advertise domestic processor production and is willing to offer financial backing to Intel. That’s bullish for Intel stock in the long term, but short-term hiccups are sure to occur as the corporate spends money today to plot a comeback in the approaching quarters.
The financial market tends to be forward-looking, little doubt, but it surely’s also highly reactive to immediate headline shocks. Ultimately, there could also 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 protracted view
Before addressing the bombshell disclosure that tanked Intel stock in after-hours trading on Tuesday, it’s worthwhile to debate the corporate’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” in some unspecified time in the future.
So far as “profitable growth” goes, the market seems to have an “I’ll imagine it after I see it” stance for the moment. It’s hard guilty investors for being skeptical, especially when Intel is preparing the marketplace for immediate pain with the statement, “Intel Foundry’s operating losses are expected to peak in 2024.”
That’s like saying, “Things will recuperate, but not immediately.”
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 down around and wait for Intel’s losses to “peak.”
Moreover, the corporate is evidently “driving for Intel Foundry to attain break-even operating margins midway between now and the tip of 2030.” Again, Intel is largely asking investors to be very patient and forgiving. That’s a tall order when the market has a lightning-quick attention span and a bent to concentrate on shiny objects as a substitute of slow-and-steady improvement.
Then again, holding INTC stock for the long haul could repay big time. Intel hopes to attain 40% non-GAAP gross margins and 30% non-GAAP operating margins for Intel Foundry by the tip of 2030. To get there, the corporate will deploy its foundry in pursuit of “manufacturing a bigger percentage of Intel’s products.” It’s a worthwhile endeavor, if not a simple one.
Intel’s floundering foundry
There’s nothing inherently unsuitable with Intel eyeing ambitious goals for its chip-foundry unit. Unfortunately, it looks like the corporate’s recent financials aren’t inspiring confidence in wary investors.
In accordance with 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. Specializing in Intel Foundry and producing chips for artificial-intelligence (AI) applications are a part of Gelsinger’s comeback strategy.
Alas, Intel’s comeback story won’t unfold easily and capital outlays. Gelsinger and the corporate may deserve kudos for being honest in reporting Intel Foundry’s financial challenges, but sometimes the market will punish full disclosure quite than reward it.
Nonetheless, Gelsinger is evidently determined to reveal the great, the bad and the ugly in the case of Intel Foundry.
“We imagine this transparency and accountability is required… The required transformation is well underway,” the Intel CEO assured.
Speaking of transparency, Intel admitted that its foundry business incurred an operating lack of $7 billion in 2023. This may occasionally be a deal breaker for skeptical investors, because it represents a setback in comparison with 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 protracted sell-off in INTC stock. Consequently, short-term traders might need to stay out of the best way and let the sellers control the stock’s price motion for some time.
Nevertheless, in case your time-frame extends to years as a substitute of days, weeks or months, it’s not a terrible idea to carry 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.