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Despite some distractions such as monetary engineering discussed here, Intel’s global inventory (INTC) remains heavily affected by two short-term issues: declining PC demand from recession and post-COVID and persistent delays in procedure as Intel catches up to regain leadership in 2025. Since those two problems will likely end up being rather temporary, investors with a longer-term mindset can take advantage of existing weakness in stocks.
First, Intel announced its memorandum of understanding with Brookfield in February as part of its investor assembly and as part of its “Smart Capital” strategy, which Intel first discussed due last year when it postponed its 2021 investor meeting until February. Smart capital is a generic term for all projects Intel undertakes to reduce its capital load of building new factories to catch up with scarcity demand and to meet long-term projected demand due to growth.
The first pillar, and the key detail to avoid long-term shortages, was a shell-first strategy, in which Intel would build empty enclosures (~20% of the cost of production) before filling them with equipment. The concept is that, in terms of lead times, it’s the other way around, because it takes maybe two years to build a hull and only a year to fill it with equipment.
Intel has tried to make this an advantage, but it’s clear that it’s really a burden to have to build empty casings first (about $2 billion according to fab), as those investments evidently don’t generate profits until they’re full of gadgets when the factory structure is complete and the factory starts working. For clarity, an empty factory structure does not depreciate, but has an obvious effect on the flow of loose money.
However, it’s understandable that Intel needs to avoid shortages in the long run, especially since Intel is now installing a foundry. Given the early start of smelting, there is probably a lot of uncertainty about the acceleration of this company. so it is more important to be careful than to have to reject consumers because there is no capacity available. If the activity grows rapidly, those helmets will be filled with capacity.
The moment pillar of smart capital was already part of the original definition of “IDM 2. 0” when Pat Gelsinger became CEO: expanding the use of third-party factories. with problems such as scarcity. Using foundries probably leads to a decline in gross margins, but saves some capex investments like classic consumers without a factory.
The 3rd pillar is customer engagements. I will refer to TSMC (TSM), which turns out to have benefited very well from Nvidia’s prepaid (NVDA), which, given the recent slowdown, have proven to be too large, resulting in excess. Nvidia still had no choice to swallow this capability, resulting in loss of value and depreciation. Intel had also used this style in the past for its NAND business.
The fourth pillar, which has been the subject of widespread exposure and public debate, covers government incentives, i. e. subsidies, i. e. donations. Given the advantages of creating well-paying high-tech jobs, those incentives have historically been in the order of 10% of the cost of the initial structure. For example, Intel received about $1 billion for its next $10 billion Israeli plant. Legislation will be offering up to 30% incentives. Intel argued that this only brought Intel to the same point as subsidies in Asia (including Taiwan).
So far, apart perhaps from the use of foundries, the 4 pillars of smart capital do not replace the underlying economy of the company. However, this is where the 5th pillar comes in, the recent announcement of the SCIP (Semiconductor Investment Program) with Brookfield. Intel called it “the first of its kind. “While some media outlets compare the style to other supposedly similar co-investment systems from other foundries, Intel is right to say that this is, in fact, the first program of its kind.
The “Explain as If You Were Five Years old” edition is that while Intel will continue to operate its factories as usual, the factories (and their related costs, revenues, and profits) of the SCIP program will only be 51% owned through Intel. . . At the time of the 7 nm delay, other people were talking about the separation of the factories and/or the end of the IDM. Well, this style is the closest Thing Intel will probably get to creating its factories.
The saying goes that there is no loose food, and that also applies here. As mentioned, pricing and benefits are shared 51-49 between Intel and Brookfield. Basically, this means that Intel is abandoning short-term pricing for long-term profits.
In other words, think you have money to build a factory. However, he sees AMD (AMD) and others taking part in the market, which he should avoid. So, he goes to Brookfield and they will give him the money to build. two factories, but in return, they need the profits of one of the two factories.
That’s why I invented this not-so-smart capital strategy, because for Intel shareholders there is no advantage. Yes, Intel will build more factories than it could have had without the program (and without going into debt), but precisely, none of the surplus profits will pass to shareholders, since Brookfield will be the shareholder.
Specifically, Intel talked about receiving $15 billion from Brookfield to expand its two plants in Arizona worth $30 billion, confirming that this is similar to the “buy one, get one for free” sales tactic. It’s worth noting that Intel first announced those factories in early 2021 as part of Pat Gelsinger’s Intel Foundry Services announcement, but it turns out that the rate (and with that the scope?) of factories has increased, as Intel had initially talked about a $20 billion investment.
Intel announced earlier this year that it had opened its $3 billion D1X Mod3 in Oregon. Intel is also busy lately equipping its $7 billion Irish EUV extension, which will produce Intel 4 next year.
In addition, Intel has several fabulous projects at the birth of the structure phase. As already mentioned, Intel is structuring a new $10 billion plant in Israel, and the inauguration of the two plants in Arizona ($30 billion) took place last year earlier than expected. (These are the factories sent to the initial SCIP program. )There are already 4 factories on the same Arizona campus, with the most recent Fab 42 birth production of $9 billion in 2020. Note that Fab 42 is an (accidental) example of the “shell first” strategy discussed above: it was first built about a decade ago (in 2012) as a 14nm factory, but it was never filled with gadgets due to the decline of PCs. (It was later announced as a 7nm factory through BK in 2017, but commissioned earlier to address shortages. )
In addition, Intel aims to build two new megafabs over the next decade, one in Ohio (“silicon heart”) and one in Germany (“silicon junction”). In full construction, they will most likely surround 6 to 8 factories each. , worth up to $100 billion at each site ($200 billion in total). The first investment promised is about $20 billion for each. For reference, if Intel were to get the full 30% rebate for the two factories, the total capital repayment for government incentives would be $60 billion. Unlike the SCIP program, it would be a genuine “buy two factories, get one for free” document.
Obviously, however, the scope of the task will be subject to the demand Intel may generate for its products. Pat Gelsinger had said in the past that he wanted to move faster and faster, but in light of the existing shift from scarcity to oversupply/recession, it remains to be seen whether subsidies or demand will limit the speed of construction. Some investors would possibly also note that TSMC had recently improved its outlook for the full year (although the top end of the investment consultant has been reduced from $44 billion to $40 billion, but this is likely due to equipment shortages), which seems that not every company and every sector is affected in the same way.
In addition to the factories, Intel is also investing in meeting and testing facilities (packaging), with an investment of $7 billion in Malaysia and $3. 5 billion in Rio Rancho.
Keep in mind that Intel has some influence on building new plants, because even in the case of a construction disappointing in demand, Intel can regain some in-house casting capacity, as this can help the economy once Intel regains leadership and superior process. Yields
In the wake of the second-quarter slowdown (failure and disadvantage, the opposite of pace and stimulus), some analysts began to question the sustainability of the $6 billion annual dividend payment. Intel had already halted percentage buybacks, but the strong relief in currencies and therefore the relief in gross profit is putting further pressure on the loose cash flow, which, due to the existing “investment phase, Intel had already guided would be at most productive to balance. As a result, Intel has already made some changes to keep the FCF forecast unchanged, those changes have been less than expected as Intel now expects more capital compensation in 2022 than expected.
Still, the new SCIP still raises the question of whether Intel deserves to have cut the dividend or simply borrowed more, because, as noted, all this program does is decrease initial capital investment, but “in return” it will have an effect on long-term earnings. of those factories, because 49% of the profits will go to Brookfield instead. It should be noted that Intel’s investor assembly style assumed a rather giant accumulation in FCF from (below) the existing break-even point point to 20% through 2026.
It’s rarely the first time Intel has played the game of financial engineering, for better or worse. Intel has already left the NAND market before and, as a result of the gigantic Q2 and steering failures, Intel will soon be leaving the market as well. 3-d XPoint/Optane business (admittedly loss/unprofitable).
In addition, due last year, Intel additionally sought to list a mining stake in Mobileye, raising between $5 billion and a $50 billion valuation, though it’s unclear whether the plan will continue given the market slowdown.
Pat Gelsinger had big plans to restore Intel to its former glory when he became CEO. The three-headed dragon consisted of its strategy that encompassed the following elements: restoring procedural leadership (see Intel Stock: Turnaround Starts In 2025 (NASDAQ: INTC)), to repair product leadership (see Intel Stock: No Pain, No Gain (NASDAQ:INTC)), and building more factories to meet the resulting increased demand (both through entering new markets and recovering market share in enterprises). existing).
SCIP’s latest announcement is the newest step in Smart Capital’s strategy to lessen the monetary burden of building new plants. However, investors who saw the announcement were likely disappointed, as the program necessarily says Intel will build two factories worth one. . . . and, in fact, only one of the factories will contribute to Intel’s profits, while the other factory will gain Brookfield advantages. Instead. Therefore, there is no loose lunch.
Overall, investors sought to get Intel back to its engineering roots when Pat Gelsinger returned to Intel, to follow the monetary engineering trail that Bob Swan had charted with the many acquisitions. While Intel has greatly increased its investments in capex and R
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Disclosure: I have/have a long advantageous position in INTC shares, whether through ownership of shares, features or other derivatives. I wrote this article myself and expresses my own opinions. I don’t get any refunds for this (other than Seeking Alpha). I have nothing to do with a company whose shares are discussed in this article.