Intel: We Still Have A Problem (NASDAQ:INTC)

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While the market is promoting excitement for Intel (NASDAQ:INTC) around the potential windfall money from the CHIPS bill, the market is still missing the biggest problem. The chip giant is still set to underspend industry leader TSMC (TSM) and is far behind on process technology. My investment thesis remains Bearish on Intel, even at the multi-year lows near $50.

CHIPS Money

On Wednesday, the CEOs from Intel, Micron Tech. (MU) and others spent the day in Washington DC promoting the approval of over $50 billion in subsidies for the semiconductor sector to build new fabs in the U.S. The move is seen needed to ensure the U.S. has next generation chip production in the U.S. in the case of a Chinese invasion of Taiwan where a large portion of such chips are manufactured currently.

Both the House and Senate have approved bills with $52 billion in funds to support semiconductor research, development and manufacturing. The bills differ in how to appropriate the funds with the House bill assigning $8 billion to the Green Climate Fund of the UN to oversee climate change.

In addition, the bills appear to go far beyond the key focus impacting Intel which is subsidies and loans for building chip production facilities in the U.S. The bills apparently include sanctions on China for the bad treatment of Muslim Uighurs along with other differing provisions relating to Taiwan and Hong Kong.

All of the political issues included in the bills related to China moves the goal post from the original intention of solely focusing on improving domestic chip supplies, in case China ever takes actions in Taiwan to cut off the U.S. These additional political issues, especially those unrelated to Taiwan, add a higher level of complexity to the approval of any CHIPS bill.

Intel has already committed to spending $27 billion on capex this year. In addition, the chip giant has committed to spending $88 billion in Europe over the next decade along with building a fab complex in Ohio at an initial cost of $20 billion for two new leading-edge chip factories.

So far, Intel is spending a substantial amount of money without any guarantee of obtaining subsidies from the U.S. government, or even knowing the actual amount considering the differing amounts in the bills. Besides, TSMC has already announced the intention to spend over $44 billon on capex this year, far swamping any plans of Intel.

TSMC Problems

The major problem with the Intel foundry business relaunch is that the key customers to target for next generation chips are all major competitors for Intel chips. These potential IDM 2.0 customers all use TSMC for chip manufacturing and are highly unlikely to switch to Intel anytime soon.

According to varying industry reports, the top TSMC customer by far is led by Apple (AAPL) at 25% of sales. This report from The Information Network has Apple steady leading customer for the last few years with Chinese HSilicon falling from the list due to sanctions.

TSMC customer share list

Source: Tom’s Hardware

The other key semiconductor players are AMD (AMD), Qualcomm (QCOM), NVIDIA (NVDA) and Broadcom (AVGO). These companies all either compete directly with Intel or wouldn’t want a chip design firm with access to their proprietary technology. Along with Apple, these top companies account for nearly 60% of the TSMC revenue.

A different report compiled by DigiTimes and Bloomberg comes to far lower market shares totals after Apple, though the same semiconductor companies are listed as the leading customers. Not to mention, this data suggests Intel already accounts for over 7% of the TSMC revenues and provides possibly the only major source of TSMC revenue that could come back to manufacturing by Intel in the U.S. In addition, Mediatek is a Chinese company unlikely to utilize chip foundry services from an American company in a U.S. facility with their 5G chips supplying mostly Asian smartphones.

Of course, NVIDIA CEO Jensen Huang presented the possibility of using Intel IDM 2.0, but one has to take these comments with a grain of salt. Intel is a major competitor in the GPU market and the executive clearly has the incentive to promote alternatives in order to obtain better wafer pricing from TSMC and Samsung (OTC:SSNLF).

TechTaiwan suggests TSMC has ~500 customers, so clearly Intel can grab a few low-end customers not satisfied with their positions in line at TSMC. Unfortunately though, those customers would probably only move, if Intel can compete better on leading-edge process technology. This part isn’t guaranteed.

The company is likely to obtain Department of Defense and other government related chip orders that already don’t flow to current Intel fabs in the U.S. Other companies with sensitive chip designs that don’t feel threatened by the chip giant could definitely sign up for foundry services. Unfortunately, Intel just isn’t likely to obtain the bulk orders of the major chip design competitors.

Takeaway

The key investor takeaway is that the CHIPS bill is far from certain and the amounts actually assigned to new fabs appears far less than expected. Intel continues to have a major problem heading down the IDM 2.0 path with most large customers unlikely to user their foundry services other than to pressure TSMC for better prices.

Intel still has major problems making the stock a Sell. The company has to ramp up spending too much without any guarantees of gaining ground on market leader TSMC.

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