Everyone hates this stock, but it could become the next AMD

Hello, reader.

Tom Yeung here with today’s Smart money.

In 2007, Advanced Micro Devices Inc. (AMD) CEO Hector Ruiz knew his company was in trouble. Although he saved AMD from the dot-com boom, the industry veteran just couldn’t make the company profitable.

The problem was AMD’s manufacturing business—a capital-intensive segment that soaked up cash like a vacuum cleaner. No matter how much money AMD made from its lucrative chip design business, it would all disappear into building its advanced manufacturing plants (“fabs”).

“Expenses for a flagship factory were doubling every two or three years,” a senior AMD executive said at the time. “And now we’re looking at over $100 billion in campus investment.”

The financial crisis of 2007-2009 only worsened the company’s financing situation.

The answer was a stroke of genius. In 2008, Ruiz announced that he would split his company in half. The “good” chip design unit would begin operating under the AMD name, and the fabled “bad” business would become its own entity, GlobalFoundries Inc. (GFS).

The result was nothing short of remarkable. Freed from the financial (and physical) limitations of its factories, “good” AMD began working on advanced designs that would eventually make it to major gaming platforms like the PlayStation 4 and Xbox One.

AMD stock has risen 4,100% since its split in 2009, and AMD has evolved from a second-tier player to a top chip supplier.

Surprisingly, “bad” GlobalFoundries was also successful. The fab-focused company no longer needed to pour billions into state-of-the-art fabs for AMD, so it focused on making cheaper, older chips at a discount. GlobalFoundries would see its valuation rise from an initial $1.5 billion to over $21 billion today – a 1,300% increase.

That’s why the chip and fab designer situation I want to talk about today isn’t as bad as it seems. In fact, its situation is eerily similar to AMD’s in 2007-’08… and that could be good news for the company.

Here is the story…

Building our case

First, let’s consider the bad news.

Manufacturing plants a Intel Corp. (INTC) – once the envy of the world – have been left behind. In February, Intel CEO Pat Gelsinger admitted that his company would rely on Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) to build their latest Intel Core series.

This is reportedly the first time Intel has outsourced core central processing unit (CPU) manufacturing to an outside factory.

At the same time, Intel’s design team was forced to continue with next-generation designs that the company would never be able to produce in-house. The team knows that Intel models can’t lag behind and if the company wants to survive.

But there are some silver linings…

• Intel remains THE dominant processor supplier, supplying over two-thirds of the key processors in PCs, laptops and servers.
• The Silicon Valley legend remains profitable; Analysts expect the firm to post profits of no less than $1 billion this year before seeing that figure rebound to $4.6 billion next year.
• And perhaps most importantly, Intel remains one of the few American firms that could revitalize the country’s high-tech chipmaking industry — a fact not lost on either major political party.

Since 2000, the Santa Clara, Calif.-based firm has received about $14.5 billion in government subsidies. Almost half came before 2015.

To paraphrase Eric…

If Intel doesn’t build its domestic manufacturing capacity, who will?

In other words, Intel’s design business (the “good” Intel) and its fabled segment (the “bad” Intel) both remain incredibly valuable.

That’s probably why.

Qualcomm Inc. (QCOM) addressed Intel Corp. (INTC) about a potential takeover last week.

from The Wall Street Journal story…

A deal would significantly broaden Qualcomm’s horizons, complementing its mobile phone chip business with chips from Intel that are ubiquitous in personal computers and servers.

Qualcomm and Intel have also sought to capitalize on the artificial intelligence boom with the advent of AI features in phones and computers..

Companies like Qualcomm love a lot about Intel.

Leading chip designers like Qualcomm and Nvidia Corp. (NVDA) they know they are becoming too dependent on a single foreign supplier – Taiwan Semiconductor – and Intel is the only American company that can provide an alternative.

In addition, Intel owns half of the X86 processor duopoly with Advanced Micro Devices. AMD got into much of this business with a $49 billion acquisition of chip designer Xilinx in 2022, making Intel’s current price of $96 billion look cheap (considering the other assets it Intel also controls them).

Private equity is also becoming interested in Intel at current valuations. On Sunday, Bloomberg reported that Apollo Global Management Inc. (APO) is considering a cash injection…

The alternative asset manager has indicated in recent days that it would be willing to make a stock-like investment in Intel of up to $5 billion..

That’s great news for Intel. Again, to paraphrase Eric…

Intel is trying the near impossible with its plans to catch up with its rivals. That makes his plans insanely expensive… So everyone hates the stock.

That means these overtures are particularly good news for Intel.

Over the next five years, Intel will need to spend over $100 billion in capital investment in the US to move from the latest 5nm to the latest 2nm technologies (assuming it remains a single company) . It will need at least $20 billion (and as much as $50 billion) of external cash to do so.

Will Intel break up?

So what will Intel do next?

On the one hand, the legacy chipmaker could consider breaking into “good” and “bad” pieces like AMD did. Intel CEO Patrick Gelsinger already announced earlier this month that his company would create a separate entity for its foundry business, the first step in separating the two entities.

On the other hand, Intel is betting on updating its factories TO still pay. It only needs to keep up with two competitors (Taiwan Semiconductor and Samsung), and that could save the firm from being strong-armed by suppliers. No chip designer wants to rely 100% on an outside manufacturer.

Intel’s path will now be determined by how much money it can raise from suitors like Qualcomm, what terms those financiers will demand, and how well Intel’s bet on next-generation 18A chip production goes.

Although “bad” Intel will continue to need more money, it might be worth keeping if the US government and others throw in their money.

In the meantime, we continue to see Intel’s potential for three reasons…

1. Potential for a bidding war. Competing offers are almost always positive for the acquisition objective, as bidders tend to be excited and overpay. Bausch + Lomb Corp. (BLCO)for example, it rose 30% this month after six private equity firms began expressing interest in a buyout.
2. Buying the rumor. Studies have long shown that markets do indeed “buy the rumor,” where stocks tend to rise after potential trades are released or rumored. A French study found that the shares reached a peak 50 days after the rumors were broadcast in the media.
3. Retail investors are buying. Retail property is up 25% in the past two weeks, according to data collection firm Fintel.io.

That means the former Silicon Valley darling has finally become too cheap to ignore.

Intel still runs a world-class processor design unit and has ambitious plans to revitalize its high-end chip business. If he succeeds, people will look back at what will become a trillion dollar firm and ask, “Why didn’t I buy at $20 a share?”

Of course, there’s no guarantee that Intel — or any stock — will succeed.

So if you buy shares of INTC – or any shares – you must have a solid exit strategy in effect for when the next major sale occurs. Something based on math and data, not emotion.

That’s why I want to turn your attention to a discussion that Eric had last night.

He sat down with a special guest who revealed a powerful tool that could help you determine the best time to sell your stocks before the next big bust hits.

You can watch their video conversation now.

We’ve got you a 90-day trial, but you have to act before September 30th.

Sincerely,

Thomas Yeung

market analyst, InvestorPlace