Hello, Reader.
In Tuesday’s Smart Money, I chronicled my now decades-long quest for stocks of value. Specifically, India stocks vs. Intel Corp. (INTC).
To quote Cheryl Crow, “No one said it would be easy, but no one said it would be this hard.” But, as it is, that is the nature of a worthy quest.
And like any good hero’s journey, mine revolves around the theme of change.
While I initially sang the praises of India stocks, I have since changed my tune in favor of Intel.
Here’s why…
Founding Foundries
The bullish case for Intel relies on the long-term turnaround plan CEO Pat Gelsinger detailed when he took the helm three years ago.
It’s a plan he calls “Integrated Device Manufacturing [IDM] 2.0,” which features four key initiatives…
- Expand internal and external chip-manufacturing capacity to address unprecedented global demand for semiconductors…
- Build new, world-class foundry capacity, both to recapture technological superiority and to manufacture chips for other companies and the U.S. military…
- Regain process leadership…
- And deliver leadership products in every category in which Intel competes.
Intel is making demonstrable progress on all four of those initiatives.
During the company’s most recent earnings call, Gelsinger repeatedly highlighted two particular factors that support his optimism for Intel’s long-term growth.
First, the fledgling “Intel Foundry Services” (IFS) division is gaining rapid momentum. This is the division responsible for ramping up Intel’s semiconductor manufacturing capabilities, both in the U.S. and Europe.
Historically, Intel has only manufactured in-house chips of its own design. But Gelsinger now plans to build factories that make chips for other “fabless” companies, including high-profile semiconductor designers like QUALCOMM Inc. (QCOM), NVIDIA Corp. (NVDA), and Apple Inc. (AAPL).
To fulfill this vision, Intel is stressing its balance sheet to build multibillion-dollar, state-of-the-art foundries, like the $20 billion facility under construction in Ohio.
This grand plan is neither cheap nor easy to deliver, especially in the face of constant criticism from Wall Street, but Gelsinger is forging ahead… and making major strides in building Intel’s foundry ecosystem.
During the last 12 months, IFS has struck more than 40 strategic agreements with various corporate and military entities, and is testing dozens of chips on behalf of these potential foundry customers. The lifetime-deal value for IFS has surged to $10 billion, which is more than double the total from a few months ago.
Gelsinger expects this number to soar over the coming years, thanks to AI. As he stated on the earnings call…
The rapid adoption of AI by industries is proving to be a significant tailwind for IFS as high-performance compute, an area where we have considerable wafer and packaging know-how and IP, is now one of the largest and fastest growing segments of the semiconductor market…
New Generation of Computer
The second factor that Gelsinger expects to power Intel’s long-term growth is “on-prem compute.”
He believes the growth of AI applications will cause many enterprises to migrate a lot their data processing infrastructure from cloud-based data centers to on-premise AI PCs and servers.
Simply stated, an AI PC is a new generation of computer with components that are specifically designed to run powerful AI-accelerated software. Without these components, AI workloads operate very slowly, or not at all.
Although most companies will continue to use a “hybrid” platform that includes both cloud and on-prem infrastructure, the on-prem portion will likely embark on a massive new growth wave.
That growth will require a sweeping upgrade cycle from legacy PCs and servers to next-gen AI machines that can handle the processing workloads that AI applications require.
Again from Gelsinger…
We’re seeing a lot of excitement for the AI PC. So we do think that it’s going to bring a multi-year cycle of growth…
The enterprise market, as we see it for data centers, is very much going to be an on-premise play… And that’s an area of good strength for Intel.
This sweeping upgrade cycle is already underway. In 2024, alone, Intel expects to produce 40 million AI PCs for OEM partners like Acer, ASUS, Dell, HP, Lenovo, and Samsung Electronics.
AI will clearly be critical to Intel’s long-term growth. It’s force for good for the semiconductor manufacturer.
However, AI does have the potential to be a disruptive force in the world – “the most disruptive force in history,” according to Elon Musk.
As we’re closer than ever to reaching a technological tipping point, I’m calling for an AI Code Red.
If you want the chance to end up on the winning side of AI’s disruptive force, click here to view my short presentation.
Regards,
Eric Fry
