Intel Upgraded by Jefferies Amid Changes in its Management Team and the Prospects of a Restructuring That Includes the Possibility of Going ‘Fabless’

Jan 21, 2020
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Jefferies analyst Mark Lipacis has upgraded the rating for Intel (NASDAQ:INTC) to ‘Hold’ from the previous ‘Underperform’ designation while, concurrently, raising the chipmaker’s stock price target from $40 to $64, an increase of 60 percent. Bear in mind that Intel closed at $59.60 on Friday and that its current price level corresponds to a market capitalization of $256.13 billion.

The primary factor that prompted an upgrade from Jefferies relates to the potential for "dramatic change" in 2020 and 2021 owing to an overhaul in the chipmaker’s management team. In a stark departure from its customary practice of promoting internal talent, Intel has - of late - embarked on an external recruitment drive, whereby, it has managed to attract notable executives from the competition. As an illustration, the chipmaker hired GlobalFoundries Chief Technology Officer (CTO) Gary Patton in December 2019. Notably, Patton has also worked for over a decade in IBM’s (NYSE:IBM) chip unit. Additionally, over the past year, Intel appointed Jim Keller from AMD as the senior vice president overseeing SoC silicon engineering. Raja Koduri was also lured away from AMD (NASDAQ:AMD) in order to work in Intel’s architecture, graphics and software departments. Moreover, the chipmaker hired its current Chief Engineering Officer, Murthy Renduchintala, from Qualcomm (NASDAQ:QCOM).

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Intel has also been shedding personnel. As an illustration, Rajeeb Hazra – corporate VP of Intel’s Data Center Group and GM for the Enterprise and Government Group – departed in November 2019. In addition, reports on Friday indicated that the silicon giant is planning to layoff between 25 percent and 33 percent of its workforce in the crucial Data Center Group. Though it has yet to confirm this latest mass layoff, Intel is likely to reveal more information on Thursday as it announces financial results for the fourth quarter of 2019. Nonetheless, this frothing churn in Intel’s management team has spurred hope among analysts of a proactive revival.

Another reason provided by Mark Lipacis for the upgrade relates to the potential of a targeted restructuring in boosting Intel’s earnings, free cash flow and the stock price. Though details are scarce, the analyst speculates that the restructuring could come in the form of the divestment of the memory business, slashing SG&A spending and, interestingly, selling its fabs to a rival in order to transition to a fabless model.

How would a fabless model work for Intel?

We know that the chipmaker’s first 7nm products (equivalent to TSMC’s 5nm nodes) are expected to launch in the fourth quarter of 2021. In the meantime, the company is still unable to meet the full demand for its 10nm products (equivalent to TSMC’s 7nm nodes) which, in turn, translates into greater reliance on its 14nm products. Meanwhile, AMD is already producing its 7nm chips. Moreover, as per a report in Taiwan’s DigiTimes on Friday, Intel's supply issues are expected to last through 2020 till the end of the year.

In such a scenario, should the silicon giant judge the regaining of a competitive edge against AMD too costly, it can sell its manufacturing business to a competitor while securing a Wafer Supply Agreement (WSA) similar to the one that currently exists between AMD and GlobalFoundries. Granted that such a development looks highly unlikely at this stage, however, the fact that the competent analysts at Jefferies are even contemplating such a scenario makes its casual dismissal difficult.

Intel currently controls nearly three-quarters of the global CPU market. Moreover, as detailed by Intel’s CEO in an exclusive Wccftech interview, the company is also focusing on GPUs, FPGAs, AI, next-gen 5G technology, etc. rather than solely relying on its CPUs. It should be interesting to see, therefore, if this positive prognostication by Jefferies pans out for the chipmaker.

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