February 23, 2021

Breakingviews: Intel fab spinoff might double its value

by Breakingviews.

Intel has a new, old boss. Pat Gelsinger, returning this week to run the $250 billion company where he was the first chief technology officer, could change a few things, like separating chip design from production. Intel’s stock trades at a big discount to both peers that design processors like Advanced Micro Devices and specialists like Taiwan Semiconductor Manufacturing that make them. At least in theory, a split could double Intel’s market value.

Intel already outsources roughly 15% of its manufacturing. Doing more of that would spare Intel’s design arm from limitations and delays in what its own factories can produce. Pure chip design is much less capital intensive. A focused semiconductor production arm would probably benefit too, as U.S. automakers and other businesses are worried about chip scarcity and lawmakers are keen to have semiconductor fabs onshore.

One way to look at it is to assume Intel sells its fabs for book value. Jefferies estimates the company might reap over $30 billion from a sale. Outsourcing production could reduce margins, but it would also result in perhaps $7 billion of additional free cash flow annually. That’s about a 40% addition to Intel’s average in recent years, potentially for handing to investors. In that scenario, Jefferies pegs Intel’s stock price at a possible $100, more than 60% higher than at present.

Another back-of-the-envelope approach is to look at where AMD and TSMC trade. Their price-to-estimated earnings ratios are around 44 times and 29 times, respectively, using Refinitiv data. Intel’s equivalent PE ratio is a mere 13 times. It’s the same story with enterprise value-to-EBITDA metrics. AMD, TSMC and Intel are valued at 33, 16 and 8 times estimated EBITDA, respectively. If Intel’s two parts could together catch up just to TSMC’s multiples, they could command a combined $500 billion-plus market capitalization.

If Gelsinger chooses to outsource all Intel’s manufacturing it will be a seriously long-term project. Semiconductor shortages are widespread and advanced fabs booked up. TSMC, as one example, is adding roughly $10 billion to capital expenditure this year to keep up with demand.

That means moving production away from Intel’s own fabs could take years. Gelsinger has hinted at less radical steps in that direction. That will give him space to get Intel’s engineering back on the cutting edge first.

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