It’s all change at Intel (NASDAQ:INTC). Starting tomorrow, the chip giant will put into action a significant restructuring that separates the company into two distinct entities: a standalone fabless semiconductor company and a pureplay foundry called IFS, each reporting their own financials.
Although this won’t alter the combined entity’s earnings potential, it will provide investors with insights into the design side of the company as a fabless entity, as well as the potential margin improvement given it will no longer be connected to its internal fabs.
Similar to patterns seen at AMD, Barclays analyst Tom O’Malley thinks the move will provide a “more stable margin structure” for the core INTC product groups. However, it will also result in a “significant cost overhead” typically associated with being an IDM (Integrated Device Manufacturer) transferred to the IFS business.
“We believe that if the company is successful in their vision to be at parity with TSMC at 18A, that the re-segmenting event will be looked back on more favorably,” O’Malley opined on the matter. “However, there is material skepticism on reaching this result. INTC is opening the door to more visibility on each of their business units and while they are recognizing a one-time optical margin benefit, any deterioration in the core and/or foundry business will be more heavily scrutinized from here on out.”
As for the key debates around the event, O’Malley is also not convinced the move will actually enable the core business to attain improved profitability. However, regarding the possibility the company will eventually spin off IFS, given Intel has already gone down that route twice (both with Mobileye and the recently announced plan to IPO the standalone PSG/Altera unit), O’Malley thinks that’s highly likely. “While it is too early to say what IFS could be worth in an eventual IPO process, the company’s intention to grow the business into the 2nd largest foundry in the world indicates significant value if they are ultimately successful,” he said on this issue.
As for investor sentiment, O’Malley thinks there is “little that changes as a result of the re-segmenting.” Ultimately, the analyst notes that overall success in revenue generation hinges on the effectiveness of its process technology, while bottom-line success depends on maintaining a disciplined cost structure. These two elements have been central initiatives during the Gelsinger/Zinsner era, as evidenced by their emphasis on achieving 5 Nodes in 4 Years and their stated objectives of reducing costs by billions. “While the company is making good progress on both,” O’Malley summed up, “the end result is still TBD.”
As such, O’Malley rates Intel shares an Equal Weight (i.e., Neutral), along with a $44 price target, implying the stock is currently fully valued. (To watch O’Malley’s track record, click here)
O’Malley’s thesis chimes well with most of his colleagues. Based on a mix of 24 Holds, 7 Buys and 4 Sells, the analyst consensus rates the stock a Hold. The $46.60 average target implies shares have room for modest growth of ~5% over the next 12 months. (See Intel stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
