Intel’s chip manufacturing plans prompt a 6% decline in stock

Intel‘s stock experienced a 6% drop on Wednesday following the release of an update on the company’s turnaround plan. The plan aims to position Intel as a chip manufacturing company capable of competing with Taiwan Semiconductor Manufacturing Company.

During the update, Intel’s Chief Financial Officer David Zinsner discussed the company’s intention to change its financial reporting structure. This change would involve providing its foundry business, known as IFS, with its own profit-and-loss statement. This move would enable Intel to disclose its manufacturing margins.

The new reporting structure is expected to contribute to cost control measures at Intel, with the company aiming to reduce costs by up to $10 billion over the next three years.

This update arrives as investors continue to evaluate Intel’s turnaround plan under the leadership of CEO Pat Gelsinger. The plan hinges on catching up to TSMC’s manufacturing technology by 2026, a goal Intel has coined as “five nodes in four years.” To achieve this, Intel intends to utilize its own chips to address any manufacturing issues before opening its factories to third-party companies.

If Intel successfully catches up to TSMC, it will be able to compete for contracts to build high-performance chips for companies like Apple, Nvidia, and Qualcomm. Currently, these companies rely on TSMC or Samsung for their manufacturing needs, as they lack their own manufacturing facilities. Intel anticipates announcing a significant customer for its foundry business later this year.

“The manufacturing group will now face the same market dynamics as their foundry counterparts,” explained Zinsner to analysts. “They’ll need to compete for volume through performance and price. Internal customers will have the option to utilize third-party foundries, and to attract external foundry volume, they must do the same.”

While Wednesday’s update primarily focused on Intel’s utilization of its manufacturing capabilities for its own chips, the company assured that further updates regarding its foundry business and third-party customers would be provided later in the year. Intel also projected that its own chip requirements would generate $20 billion in revenue for the unit in the following year.

During the conference call, analysts expressed concerns about Intel’s gross margins and questioned how the outlined plan would contribute to their improvement. In April, Intel reported a gross margin of 38.4% for the first quarter, a decline of 51.3% compared to the previous year. Intel’s management stated their target of achieving 60% margins.

“We believe we have a solid path to reaching 60%,” affirmed Zinsner.

Additionally, Intel announced its intention to sell 20% of its Austrian subsidiary, IMS Nanofabrication, to private equity firm Bain Capital for a valuation of $4.3 billion.

“Given that level of valuation and investment made, this will turn out to be one of the best acquisitions we’ve ever made,” commented Zinsner on the deal.

Alongside Intel, other chip stocks also experienced declines on Wednesday as the overall tech stocks market faced a downturn. AMD, Intel’s main competitor, saw a nearly 6% drop, while Qualcomm fell over 3%. Nvidia, which has benefited from the recent surge in demand for artificial intelligence, experienced a decrease of less than 2%.