'This fight is far from over': Intel’s key business is nowhere near a turnaround

Despite Intel's Q3 earnings surpassing expectations and triggering a brief stock rally, Wall Street analysts remain highly skeptical about the long-term viability of its crucial manufacturing (foundry) business, Intel Foundry Services (IFS). While IFS narrowed its Q3 loss to $2.3 billion, analysts project increased Q4 losses and highlight a critical lack of external customer commitments, with only $8 million in Q3 revenue from outside clients. Concerns are amplified by suboptimal 18A manufacturing yields, its primary internal use, and the next-generation 14A process being years away, leading analysts to forecast sustained headwinds for Intel's share price amidst fierce competition from TSMC and AMD.

Analysis

Intel (INTC) reported Q3 earnings and revenue above analyst expectations, leading to a brief 8% premarket stock rally. However, Wall Street analysts remain highly skeptical regarding the long-term viability of its crucial Intel Foundry Services (IFS) manufacturing segment, despite a significant cash infusion from investors like the US government, SoftBank, and Nvidia. This skepticism suggests that the near-term positive reaction may not reflect underlying fundamental challenges.

The IFS segment, launched in 2021, narrowed its Q3 loss to $2.3 billion on $4.2 billion in revenue, an improvement from a $5.8 billion loss year-ago. Yet, analysts project a widening Q4 loss to $2.5 billion and a revenue contraction to $4.1 billion, highlighting persistent operational difficulties. A critical concern is the lack of external customer adoption, with only $8 million of Q3 IFS revenue attributed to outside clients, and the 18A manufacturing process primarily serving internal needs due to insufficient external commitments.

Further compounding challenges, Intel's CFO noted 18A yields are "adequate" but not optimal for margins, with peak capacity not expected until "the end of the decade." This, coupled with the next-generation 14A process being "a very long way off," places Intel years behind competitors like TSMC (TSM) in foundry technology and market share. Analysts, including Bank of America's Vivek Arya, maintain an Underperform rating, forecasting sustained headwinds for Intel's share price as its product business also cedes market share to AMD.

Key Decisions for Investors

• Maintain a cautious stance on INTC, prioritizing the long-term structural challenges of the Intel Foundry Services (IFS) division over short-term earnings beats.
• Closely monitor IFS's progress in securing substantial external customer commitments and the development timelines and yield improvements for its 18A and 14A manufacturing processes.
• Assess Intel's competitive landscape, particularly its widening gap with TSMC in foundry technology and market share losses to AMD, which are likely to create sustained headwinds.
• Re-evaluate INTC's valuation considering the pessimistic analyst outlook on its core manufacturing business and the extended timeline for profitability.