A foundry business is vastly different to what Intel is used to, especially as it relates to gross margins. Intel's fourth-quarter gross margins were 58%, and it expects gross margins for the first-quarter to be 58%, plus or minus a few hundred basis points. Foundry businesses are built on volume and may wind up compressing margins in an uncertain economic environment.
Intel recently upped its foundry business, winning the chip business of Altera (ALTR), making it clear that it's increasingly putting resources behind its foundry business. Apple is currently using Taiwan Semicoductor (TSM - Get Report) as its foundry right now, and any incremental business to Intel would be a blow to Taiwan Semi, and a boon to Intel, albeit potentially at the expense of margins.
The Altera deal could pave the way for more clients to use Intel's fabs, says Deutsche Bank analyst Ross Seymore. "We believe Intel is in a position to add more foundry customers in the future as it becomes the primarily supplier of high performance logic where cost is less of a concern," Seymore wrote in a research note. He rates shares "buy" with a $26 price target.
Raymond James analyst Hans Mosesmann noted that Taiwan Semi's gross margins are in the 45% to 50% range, while Intel's are much higher. It's a major change for Intel, Mosesmann noted, signifying that "the more formal entry into the foundry business is an implicit admission" Intel will not be able to use all of its plants to build its -x86 processors, as PC demand wanes.It's a risky business for Intel, but one its new CEO (current CEO Paul Otellini is retiring in May) will have to make if it hopes to stay relevant in a world that is increasingly passing it by. -- Written by Chris Ciaccia in New York >Contact by Email. Follow @Commodity_Bull
Check Out Our Best Services for Investors
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts