Lots More on the Ongoing Mess That Is Intel

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1:04I am worried about Intel. No, for real. We're recording this on October 1st, so I'm worried about some other things, but sure, sure. No, there's plenty to worry about in the world. But I'm worried about Intel specifically because it's all nice to talk about industrial policy and we're going to build these. you know, build out all these industries, et cetera. But here we have one of the true industrial giants, one of the flagship companies of the United States, getting a lot of support, our leading company in the field of semiconductors, which is a major strategic priority for the US. And they do not seem to be doing well at all.

1:43The stock is absolutely dismal. They're cutting jobs. If this is the flagship company, like them and Boeing loom very large in my head about, I guess what I would say is like, I don't know if corporate rot is too strong of a word, but yeah, like corporate rot. Not to add to your anxiety, but did you also see some of the headlines coming out of North Carolina about quartz sand? Oh yeah, I don't know what that's all about. It's kind of an interesting one. So after Hurricane Helene, there's a town called Spruce Pine where apparently most of the world's supply of pure quartz sand comes from, And that could have an impact on the production of semiconductors.

2:21So we get to, I guess we get to unveil the bullhorn for the bullwhip effect again. We're not doing this again. Apparently we are doing this again. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.? Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast.

3:01And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. Stacey, what's going wrong at Intel? What's not going wrong at Intel right now? They're in a tough spot, right? I mean, they are embarking on a very risky and capital-intensive strategy. I say embarking, but frankly, they've been along on the strategy for quite a few years now. Because CEO Pat Gelsinger came in in 2021.

3:46And so we're like at least three years into what is supposedly an embarkment on a new strategy. And if I just look at the stock price, it's lower than it was in 2015. Yeah. In fact, you know, I actually looked, I launched on the stock in June of 2009. I think it was$15.94. So 15 or 16 years ago. And it's not that far off of there now. It's had a bit of a bounce in the recent weeks. We can talk about why. general, they're in a tough spot. Yeah. I mean, the biggest issue that they're having, and we can argue is the strategy, the right one or the wrong one. That's a discussion we can have, but it might be the biggest issue is just the core business that was supposed to support them as they rolled that strategy out is no longer really sufficient to support it anymore, but they may be too far along their path to stop, right?

4:35The whole idea was, you know, we're going to be doubling down on manufacturing. We're going to be building lots of factories in the US and everywhere else. We're going to be building up a significant third-party foundry business to make parts not just for ourselves, but for other third-party customers as well. We're getting a lot of external funding to do this. And eventually, we'll get there and it's going to be great. But the problem is that these things are very intensive. They cost a lot of money. And because of the deterioration that we've seen in Intel's core business, for a variety of reasons.

5:09The macro has not been great. They were over-earning as many were during COVID and that bubble has popped. They're still losing share in many of their key markets. They've completely missed the AI revolution, which is one of the few areas of semiconductors today that's actually really on fire. And they effectively have nothing to show in that. And those markets are starting to eat into some of the core stuff that Intel does. That core business doesn't really support the path that they're on anymore, even after the subsidies and frankly, doing some other things that are probably not you wouldn't want to do if you didn't have to.

5:42They've been selling parts of some of their factories to private equity and getting cash for that. But even after all of that, you know, it's still costing them like a bunch of money that they don't really have anymore. They put out some targets recently that sort of showed a path to, you know, a better company. But in 2030, it's 2024 right now. That's a long ways away. There's a lot of wood to chop between now and then, even if they can manage to execute on that. So they're in a tough spot. So we are speaking with Stacey Rasgen, who is, of course, the semiconductor analyst over at Bernstein. We've spoken to him before.

6:14We also have Mackenzie Hawkins, who is our colleague here at Bloomberg. Mackenzie, how existential are the next, oh, I guess, let's see, October, November, December, next three months for Intel? This is a crucial stretch for Intel, in part because it's a crucial stretch for the Biden administration. The company is the single largest beneficiary of this massive U.S. effort to resource semiconductor manufacturing through what we call the 2022 Chips and Science Act. They're in line to receive eight and a half billion dollars in grants for projects across four U.S. states for commercial partners. They're also supposed to get three billion dollars to make chips for the Pentagon and 11 billion dollars in loans, not to mention 25 percent tax breaks on their U.S.

6:59investments. There isn't really a fear that the broader subsidy program will go away after President Biden leaves office. But Intel's been negotiating this award package with officials in the Biden administration for well over a year now. It's not yet finalized, and they really want to prove to officials that, yes, we need to sign these documents. We want to get money out the door, ideally by the end of this administration, because who really knows what will come after January? And they're all trying to do that before they've really, really proven the technology stack on which these awards are premised.

7:34Stacey, two questions. When you think of Intel, how important is the aid from the U.S. government to its future? And when you think of the U.S. government, how important is intel to the policy objectives of the United States? They're clearly both important. The aid from the government is helping them. And by the way, I will say I don't think they're in a critical situation from a cash standpoint right now, partially because of some of those government funds. So if you add up what they've just done, some of the restructuring that they've just announced, the CapEx cuts, the OpEx cuts, the suspended dividend, they suspended their dividend, right?

8:13The governmental funds, both from the tax credit as well as the grants as those roll in, as well as some of those private equity funds. It's something like$40 billion of incremental cash that lands on the balance sheet through the end of 2025 versus not doing anything at all. So again, I think their cash position is okay because of this stuff. I don't think they're desperate. It's partially due to those government funds. I will say, however, to get those grants, it's not like they don't get an eight and a half billion dollar check, like they're milestone based. They have to do the projects and build them out and hit the milestones.

8:45And then that money gets it gets apportioned. But that money is important. In terms of like how important is Intel for the for the government's efforts? I mean, it's clearly very important. Although I will say, you know, if the goal is really to get a ton of leading edge manufacturing capacity built in the U.S., you could argue if the government was only goal-oriented, maybe picking Intel as their champion was not the best way to go. There are other players that you could have encouraged who were, by the way, they're all building here, but you could have encouraged, for example, somebody like a TSMC to build a lot more here than they're doing.

9:19Now, that being said, we're not just goal-oriented, politics is a huge piece. It's not politically viable to do something like that. Intel is the only U.S.-based company that could even hope to build out a leading-edge footprint. And so I understand why they've been named the national champion. But I mean, it's just given the issues that they're having, it does sort of throw the eventual success of the program, especially around the leading-edge side, into a little bit of a loop. We'll have to see how things go for them. And I think it's important to remember here Intel is the largest beneficiary of the CHIPS Act, but definitely not the only one.

9:53The U.S. is in line to give more than$6 billion to TSMC, the unambiguous industry leader. There's also more than$6 billion slated for Samsung, which is building leading edge capacity in Texas. But Intel is really important. One, because the Pentagon has decided that we need an American company to make cutting edge chips for military and intelligence purposes. They've had early conversations about buying those chips from foreign owned foundries that are on U.S. soil. It's crucial that we're having TSMC building three fabs in Arizona. And that was a commitment that the U.S. government got from them with the carrot of these subsidies.

10:26But Intel, I mean, Gelsinger kind of hinged his entire turnaround plan on this U.S. manufacturing expansion, was a major lobbyist pushing for the Chips Act, riding the coattails of that subsidy program. And yes, you know, this has really high political stakes for the Biden administration and for industrial policy writ large. You know, I think it's a feature, not a bug of the program that Intel hasn't gotten any money yet. As Stacey mentioned, these are milestone based awards. You know, companies will get a tranche of money when they have, you know, first wafers out of their facilities. Look at a tranche of money when facilities are completed.

10:59But for a company that is, you know, not acutely running out of cash, but not in a great financial position like Intel, it really matters when that money actually flows. and the U.S. government is still vetting the viability of these manufacturing plans in the first place before they're willing to sign a final agreement. All they've announced is a preliminary award.

11:29Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one, EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

12:15In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Is there a viable alternative to Intel? I get the sense that maybe there isn't. I mean, there are three companies in theory that can do leading edge semiconductor manufacturing globally. It's TSMC, Samsung, and Intel. And of those three, only really TSMC is hitting out of the park in terms of executing to their roadmaps.

12:57Like Intel clearly is having problems. And again, we can talk about their roadmap and where that may be going, but they've been having issues. And Samsung as well is also having issues. Like, this stuff is not easy. Like, I always... Samsung, by the way, by the way... By the way, on the day we're recording this, October 1st, Bloomberg reporting some substantial layoffs. It's Samsung and they're losing some share to competitors like SK Hynex, et cetera, in certain lines. So, yeah, just to talk about it's not just Intel having the struggles. Okay, keep going. Yeah. Yeah. So this stuff is hard to do again.

13:30I'm always amazed that any of it works at all. But to McKenzie's point, I mean, the administration has said they want an American company to do this. And so I guess I'm wondering, like, are there ways that they could structure something with TSMC or Samsung? Or does it have to be an American company, in which case it seems like Intel is the only option? Yeah. If you want an American company to do this stuff, they are the only option. It may be helpful to talk about their roadmap. So Pat has talked a lot about what he calls five nodes in four years. And according to Intel, they're executing. Although if you kind of look at it, it's kind of questionable.

14:06I mean, they're delivering what they're calling seven nanometer today in volume. That's the old, what they used to call 10. They are now starting to ship Intel four nanometer. It's a single product that's called Meteor Lake. And in fact, it's a client PC product. It has a tiled architecture. There was one tile on there that's on Intel four. and the other three tiles are made, actually outsourced, they're made at TSMC and the margins of that product are not very good. And it's actually, it impacted their margins in the most recent quarter. They're getting ready now to ship another client product, which is called Lunar Lake, which actually from some of the bench works looks like a decent product, but it's 100 % outsourced.

14:39There's no Intel technology and process technology in it all. It's all made at TSMC. And they've talked about that further impacting their margins as we go into next year. The big one, and I think the one that Pat is kind of betting the company on it is what's called 18A. So there were two flavors. There was a 20A process that was supposed to come out with a product called Arrow Lake that they have canceled. So one of the five nodes in four years that canceled, they're going to jump straight to 18A. Their characterization of that is that 18A is so good, they don't need 20A. So I guess we'll have to see.

15:0918A in theory is when they start bringing volume back from the foundries back into their own fabs, which in theory is supposed to make their cost structure better. And if you think about the dream case that they laid out. The idea was we do this, we bring all this stuff back. It makes our margins better because the costs are better because we're now internal. It's a better process. So we can take back market share and we can charge more for our product because we can design better products. And it gives customers like lots of confidence that things are good. So they're confident to put a lot of volume with us.

15:39And we grow from there. And they talked about hitting the manufacturing business, kind of hitting break even around 2027 and then growing to like very sizable amounts by 2030. So that's the dream. It's all riding on the success of 18A. Many of the sort of, you know, kind of like supply chain checks and channels that you pick up for 18A, they're kind of mixed at best, I would say. On the positive, they just announced Amazon as a customer and I guess Amazon was willing to have their name attached to it. So I guess that's good. It doesn't look like it's a high volume part. I think it's going to take time for this to ramp.

16:10And I guess we're just waiting around and seeing. and that's probably about how long they have. You know, in theory, 18A is supposed to be here next year. They've got a low volume server part called Clearwater Forest that launches in the first half of next year. Panther Lake, which is a higher volume client product launches in the second half of next year. My guess is it'll be volume, real volume in 2026. So you got about a year, a year and a half to see whether or not they can actually manage to make stuff in a cost-effective manner for themselves on 18A. And then we'll see if that drives volume or not.

16:40But that's about how long they have, I think, 12 months, maybe 12 to 18 months, and then we'll see if this works or not. But at this point, we don't know. And, you know, Intel's ability to secure major customer commitments is, of course, a really key metric for U.S. government officials that are trying to evaluate the viability of, you know, should we be giving them$8.5 billion of taxpayer money for commercial manufacturing? I mean, they already have$3 billion set aside for the Pentagon as a customer, but if you talk to anybody in the chip industry, the Defense Department is a really difficult customer.

17:09foundries that have been in a secure Pentagon supply chain in the past have struggled to make a return on products manufactured at those fabs. And Commerce Secretary Gina Raimondo, in many ways, her legacy and her image and the kind of main purpose of her department is riding a lot on the success of this program and therefore in part on the success of Intel, not in whole. She's been calling up chip makers and saying, would you consider using Intel fabs? She asked Nvidia. She asked AMD to consider manufacturing at Intel's Ohio facilities. And, you know, Nvidia is in the earliest stages of evaluating whether that's a possibility.

17:42AMD is happy with their current supplier, which is TSMC. And so, you know, as much as the government really wants Intel to succeed, the industry wants Intel to succeed. Even TSMC does. Intel is a four to five billion dollar customer of TSMCs. The customer commitments just aren't there right now. And you can't have anything firm until you know if they can deliver. Yeah. So I think anyone that wants leading edge is going to evaluate them. Like, why wouldn't you? Like you want second sources, you want geographically secure supply. But I mean, if they can't deliver, they can't deliver. If they can deliver, they can.

18:14And that's what we're waiting for. Throwing whatever money you want to throw at it isn't going to solve that problem. This gets back to like some of our first ever episodes that we did on semiconductors years ago were just about this basic challenge that like it's brutal to get. high yields, that there's all these processes. And if you get every process at 99.99 % right, that still doesn't get you the yields that you need to get. And so their strategy is like, okay, you're building for this product, you're building for this end consumer, you're doing in-house, and then there's execution. And the big question mark is just this execution question.

18:56And we just still don't know. Yeah, we don't know this stuff. Again, even under the best of circumstances is very difficult. You know, they're going through a lot of other turmoil right now. So they're clearly in the midst of a big layoff. Yeah. They're actually canceling some of these projects. So you remember, they weren't just trying to build in the US. They had a big Germany project with other subsidies that they just paused. They had a packaging plant in Poland. I think they just paused. So like they're they don't need the capacity. They don't have the money to pay for it, even with the subsidies.

19:23So there's a lot of like other like internal turmoil that is going on there right now while they are still trying to execute on everything else that they have to do. Like, it doesn't make it easier. And, you know, this is an intensely cyclical industry, right? And, you know, when we think about what is, you know, Intel's success or failure say about the design of U.S. industrial policy, you have to remember the Chips Act, Biden signed the Chips Act two years ago. That was sort of at the earliest stages of the AI boom. And there were there were maybe warning signs about Intel, certainly, but not kind of the flashing red light that we see now.

19:54And so government officials, not known necessarily for being super nimble, are having to evaluate that in real time. You know, they made a lot of preliminary announcements earlier this year. We saw basically a multibillion dollar announcement a week in March and April. And markets change, company dynamics change. And I think the challenge is that, you know, there's a sort of lack of understanding, even among folks who pay attention to this sometimes in Washington, about whether the money has actually gone out the door. It hasn't. But the public is expecting that. Intel is expecting that. I mean, the state of Ohio is investing$2 billion in Intel's Ohio facility.

20:27Those plans are contingent on getting money from the U.S. government, but officials also have to evaluate, you know, if a company, you know, Intel or anybody else isn't able to execute on the timeline that we set out at the scale that we set out. At what point do we start talking about other options of where to spend this money? $39 billion set aside for grants. That's a lot of taxpayer dollars.

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22:21Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at Public.com. I just remembered the first time we ever had Stacey on was back in 2020, which is kind of a blur for me. But Stacey, you were bearish on Intel even back then. In fact, I think like the title of the episode was something like why the U.S.'s number one, like semiconductor company is doing terribly, something like that. I'm curious, in 2024, is there anything that would that you could possibly see that would induce you to be bullish on Intel?

23:04Like what would they need to do to prove their business case? Yeah, I mean, look, so they gave some targets. for, like I said, which were 2030. My biggest takeaway from that was from those present days was come back in 2030, right? Call me in 2030. But if you sort of, I sort of started to articulate some of that dream thesis earlier, but if you think about it, you know, it was like I said, they execute on the new roadmaps, they take market share, you know, they build out their foundry business. And if you look at the targets, and again, I'm going to refrain from giving like investment conclusions on this podcast, but just factually what they presented for their 2030 model, had them doing roughly$100 billion in total revenues, roughly$60 billion on their product groups,$40 billion on their foundry manufacturing side.