Intel’s (NASDAQ:INTC) announcement of CEO Pat Gelsinger’s departure and the appointment of interim co-CEOs came as a surprise. However, when considering the circumstances leading up to this decision, it might not be as shocking as it seems.
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At least, that’s the opinion of Banks of America’s Vivek Arya, an analyst ranked in the top 2% of Wall Street stock pros.
“Given Gelsinger’s ‘IDM 2.0’ strategy hasn’t yielded much fruit to date (GM/FCF remain pressured into 1H25 at minimum, no volume Intel 18A wafer customer announced), the transition does not come as a complete surprise,” the 5-star analyst said.
Since Gelsinger became CEO in February 2021, Intel has pursued its IDM 2.0 strategy, aiming to retain its identity as an IDM (integrated device manufacturer) while building a significant foundry business to compete with TSMC and Samsung. However, due to “subscale and declining internal customer (Intel Products),” and the potential conflicts of interest inherent in competing with foundry clients, Arya continues to “question the strategy” behind the IDM structure.
“Importantly,” Arya explained, “we now see a greater possibility that INTC considers separating its Products and Foundry arms, which would grant both businesses their much-needed operational and financial independence.”
That’s not so simple to do, though. Arya thinks there are still key hurdles in place for a complete separation, including the $8 billion CHIPS Act award, which requires Intel to retain a 35%-50.1%+ stake in its foundry business. In the unlikely event that the CHIPS Act is revised under the incoming Trump administration, there might be greater flexibility for a potential split between Intel’s various entities. Nonetheless, both the foundry and IDM businesses face their own strategic, structural, financial, and competitive challenges, with Arya seeing “no near term solution in sight.”
Meanwhile, according to the latest Mercury Q3 CPU data, Intel continues to lose PC and server market share to AMD and ARM. Additionally, the outlook for PC demand remains bleak, with Dell and HPQ indicating a delayed PC refresh cycle extending into CY25. The bad news doesn’t end there, either. Arya notes that Intel could face increased costs in the second half of CY25 due to early start-up expenses for its 18A node, which has yet to secure external validation from any major fabless customer.
The bottom line? Arya isn’t optimistic about Intel’s near-term prospects. He rates INTC shares as an Underperform (i.e. Sell), while assigning a $21 price target, implying a downside of ~5%. (To watch Arya’s track record, click here)
Other analysts aren’t brimming with enthusiasm either. With only one Buy rating against 22 Holds and 7 Sells, the consensus settles on a Hold (i.e. Neutral). Still, the $24.43 average price target offers an 11% upside over the next year. (See INTC stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
