While many semiconductor stocks surged along with the broader market in 2021, Intel (NASDAQ:INTC) was notably left behind. The chip giant’s stock gained just 3.4% last year, according to data from S&P Global Market Intelligence, while the S&P 500 registered a 27% gain.
Intel has been struggling with manufacturing delays for years. The company finally acted in early 2021, luring Intel veteran Pat Gelsinger back from VMware to right the ship. Intel’s squandered manufacturing lead led some to push for the company to spin off its manufacturing arm and focus on design.
Gelsinger took the exact opposite route. Intel is dramatically ramping up its capital spending, with plans to pour as much as $28 billion into its factories in 2022 alone. The company is aiming to win back its manufacturing edge while building out a world-class foundry business that makes chips for other companies.
The cost of this plan and the multiyear time frame of a turnaround weighed on the stock throughout 2021.
Intel’s manufacturing ambitions are going to reduce earnings until the company’s investments pay off. Analysts are expecting earnings per share to plummet 30% in 2022. This expected earnings decline is part of the reason the market cooled on the stock in 2021.
Intel needs to make these investments for two reasons. First, the company must prevent rival Advanced Micro Devices from winning too much market share. AMD has combined solid designs with cutting-edge manufacturing from Taiwan Semiconductor Manufacturing to produce chips for both PCs and servers that go toe-to-toe with Intel’s best. Intel’s stumbles have enabled AMD to stage an incredible comeback.
Second, the semiconductor industry has expanded well beyond PCs and servers. Foundries are a $100 billion industry, making chips for automobiles, smartphones, and a wide variety of other devices and products. The only way Intel can tap into much of that demand is to tackle manufacturing.
The market is clearly not sold on Intel’s strategy. A company that has been plagued by manufacturing problems for years doubling down on manufacturing at great cost is not a story that’s resonating with investors.
While 2021 was a rough year for Intel, the company has a compelling long-term growth story. Beyond building out a foundry business that could eventually bring in billions in revenue each year, Intel is going after the graphics card market. The first of its Arc graphics cards is expected to launch early this year into a market that is dealing with short supply and high prices. If Intel can put out a decent product, it could scoop up meaningful market share.
Intel’s dominance in the PC and server chip markets remains intact, albeit diminished. The company is still putting out good products. Its latest Alder Lake desktop CPUs are the king of the hill when it comes to PC gaming, for example. That dominance will help fund the company’s heavy investments in manufacturing over the next few years.
Intel’s turnaround is going to take time, and it’s going to be expensive. But the market doesn’t appear to be pricing in Intel’s growth prospects.
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