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Chip inventories decline; Intel plunges after reversal pitch

June 26, 2023: On Wednesday, Intel stock declined 6% following the group gave investors an update on the group’s turnaround plan to become a chip manufacturing company competing with Taiwan Semiconductor Manufacturing Company.

Wednesday’s update featured Intel’s Chief Financial Officer David Zinsner explaining how the company would soon change how it reports its financial effects to give its foundry business, IFS, its profit-and-loss statement, which would reveal its manufacturing margins.

Intel’s new reporting structure could also help manage costs at the chipmaker, seeking to trim as much as $10 billion over the next three years.

The update comes as investors continue to assess Intel’s turnaround plan under CEO Pat Gelsinger, which depends on catching up with TSMC’s manufacturing technology by 2026, a program it calls “five nodes in four years.” Intel plans to use its chips to work out problems in its manufacturing before opening the factories to third-party companies.

If Intel catches up with TSMC, then it can compete for contracts to build high-performance chips from companies such as Apple, Nvidia, and Qualcomm, which don’t run their manufacturing and currently often opt for TSMC or Samsung manufacturing. Intel said it anticipated to announce a key customer for its foundry company later this year.

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

Wednesday’s update was focused on how Intel would use its manufacturing capabilities for its chips. It said more updates on the foundry industry and third-party customers would come later this year. Intel also said its chip needs would contribute $20 billion in revenue to the unit next year.

Analysts on the call worried about Intel’s gross margins and asked how this plan would increase them. In April, Intel said its gross margin for the first quarter was 38.4%, down 51.3% in a year. Intel management said Wednesday it was shooting for 60% margins.

“We think we have a good path to 60,” Zinsner said.

Separately, Intel said Wednesday that it planned to sell 20% of an Austrian subsidiary, IMS Nanofabrication, to private equity firm Bain Capital in a deal that valued the unit at $4.3 billion.

“This will turn out to be one of the best acquisitions we’ve ever made, given that level of valuation and investment made,” Zinsner said Wednesday.

Chip inventories decline; Intel plunges after reversal pitch