Intel tumbles after reporting $7B operating loss in chip-making unit

Intel (INTC) on Tuesday provided a more detailed picture of its finances as part of a turnaround plan by Chief Executive Officer Pat Gelsinger, disclosing a $7B operating loss in its foundry business for fiscal 2023 on sales of $18.9B but saying it expects to break even by 2027. Following the news, Citi said it remains “doubtful” on targets for the chipmaking unit.

WIDENING OPERATING LOSS: Intel outlined a new financial reporting structure that is aligned with the company’s previously announced foundry operating model for 2024 and beyond. As such, Intel provided recast operating segment financial results for the years 2023, 2022 and 2021. The company also shared a targeted path toward long-term growth and profitability of Intel Foundry, as well as clear goals for driving financial performance improvement and shareholder value creation.

The chip giant’s CEO Pat Gelsinger broke out details on a company webcast on Tuesday evening. Amid the details of the expansion, the chip maker revealed that Intel Foundry achieved revenue of $18.9B in 2023, down from $27.5B in 2022. Intel Foundry’s operating loss widened to $7B from $5.2B in 2022. During the presentation for investors, Gelsinger said 2024 would be the year of the worst operating losses for Intel’s chipmaking business, expecting to break even on an operating basis by 2027. Intel has outsourced about 30% of the total number of wafers to external contract manufacturers such as TSMC (TSM), Gelsinger said, adding that the company aims to bring that number down to about 20%.

DOUBTFUL ON TARGETS: Citi kept a Neutral rating on Intel with a $47.50 price target after the company presented financials and margin targets for its foundry business. Intel foundry gross margin is currently negative, and management does not expect the business to breakeven until 2027 and achieve targets until 2030, but Citi remains “doubtful.” While Intel manufacturing is on track to potentially draw even with TSMC, that is for its microprocessors, not the foundry business, contends the firm. It continues to believe Intel has a very low chance to be a leading-edge foundry.

IN-LINE WITH EXPECTATIONS: JPMorgan also commented on the news, highlighting that Intel reiterated its long- term gross/operating margins targets but pushed out until the end of this decade versus prior analyst day view of 2026 time frame. Not surprisingly, the team’s Foundry segment drove -37% operating margins in 2023 due to the aggressive technology node migration roadmap and industry downturn, and the team anticipates driving a break-even OPM profile for its foundry business in 2027 and high 20%+ OPMs by the end of this decade accelerated by the transition to EUV lithography and a more normalized technology node migration path beyond its 18A process flow, the firm adds.

JPMorgan was “a bit surprised” that Intel’s current internal business unit consumption of outsourced wafers is currently about 30% and suggests that even with its aggressive node transitions, they are still falling short of performance/power/cost requirements of its PC and datacenter compute specification targets. The firm hopes that these performance differentiators improve with Intel’s upcoming 18A and 14A nodes and should help to drive its outsourced wafer consumption lower over time. JPMorgan reiterated an Underweight rating on the shares as new costumer traction on foundry remains muted, while internal BU outsourcing to TSMC is at a high point.

PRICE ACTION: In morning trading, shares of Intel have dropped about 7% to $40.96.