Morningstar Equity Research analyst Brian Colello is keeping his target price on chipmaker Intel unchanged even as its CEO exits. Pat Gelsinger, who was hired in 2021 to lead an ambitious turnaround of the Nasdaq-listed firm, announced on Dec 2 that he will retire.
Intel, which has only floundered compared to peers, saw its stock rally about 4% to US$25 ($33.60) on the news. “Given Gelsinger's loyalty to Intel, we attribute the appreciation to the market's greater optimism that Intel will be broken up and, in turn, will unlock shareholder value,” says Colello in a Dec 2 note.
Colello is maintaining his three-star rating on Intel against Morningstar’s five-tier scale. This "indicates that investors are likely to receive a fair risk-adjusted return (approximately cost of equity)”, according to Morningstar.
Colello is also maintaining his US$21 fair value estimate on Intel, below its share price.
“For any potential upside for Intel associated with spinning out its industry-leading PC and server processor design business, we fear the overhang of a massive, costly manufacturing, or foundry, business that will lose its primary customer (that is, Intel's internal CPU design team),” writes Colello.
This overhang would only worsen, in his view, if Intel's manufacturing development of Intel 18A in 2025 is not progressing as well as advertised, or if the US government Chips Act funding will not be as supportive as initially envisioned.
See also: Intel CEO Gelsinger leaves as chipmaker's turnaround flounders
Colello says Gelsinger's strategy for Intel was the “proper one” — to continue to focus on leading-edge CPU development while investing in advanced manufacturing so that Intel's foundry remains the best option for Intel's design team.
“This integrated device model served Intel well for decades when it had both best-of-breed CPU design and fabs,” says Colello. Unfortunately, Gelsinger's exit “may fast-track a breakup of design versus fabs”, he adds.
“Again, however, for any upside we foresee in the design business, we view the fabs as being all the less attractive for a potential buyer,” says Colello.
See also: Intel to cut thousands of jobs to reduce costs, fund rebound
The “best bull-case scenario”, in Colello’s view, is if Intel’s design team were spun out of Intel — “perhaps to remain independent, or perhaps merging with another fabless firm like Qualcomm, as has been speculated”.
Given the US government’s focus on onshore chip manufacturing, perhaps an even larger package of funding or incentives could prop up the fab business and make it less of an overhang on the entire Intel entity today,” adds the analyst.
Intel’s CFO David Zinsner and executive Michelle Johnston Holthaus have been named interim co-CEOs.
Holthaus was also awarded the newly-created role of CEO of Intel Products, the segment within Intel responsible for CPU design. “Again, this move may accelerate a focus on product design with greater disregard to the success (or failures) of Intel's fabs,” says Colello.
Intel shares closed 12 US cents lower, or 0.5% down, at US$23.93 on Dec 3.
Charts: Morningstar
