Intel Analyst Day – More Capex-Less Losses- PCs Slow/Stabilizing- More M&A?

10nm…
We haven’t heard any further negative news on the 10nm front. We were first on the street to report the delay and we have been keeping an ear close to the ground and don’t detect any surprises out there. Intel has been clear with its new Tick Tock Tock direction and we see almost no possibility of a Tick Tock Tock Tock or similar slip in timing. Though there is certainly reuse, we expect that 10nm associated spend will ramp in the first half of 2016 as currently expected by the street.

Capex likely to jump…
Aside from an expected ramp in 10nm associated spend we will likely also see capex spend up both in Intels Dalian Fab 68 as well as the XPoint joint venture with Micron….a sort of triple header or perfect storm of potential spending.

Replacing a “movie set” with a “real” fab in China…
The current facility in Dalian is more image than substance. The Fab produces very little actual product and was likely more for show than substance, with Intel wanting to be seen as “big in China”, both for US consumption and Chinese government consumption. (Did you really think Intel would send their crown jewels to China??) Now it appears it will be turned into a real fab producing real product.

This means that spend levels to get it up and running will be higher than other fabs as Intel is starting with almost an empty slate in Dalian and so there will be very limited “reuse” so the spend rate to get to real 3D NAND production will be almost like a “greenfield” fab.

XPoint spend likely ramping…
We would expect Intel’s commitment to XPoint to ramp as well with an increasing spend associated with the Micron JV. Although its hard to tell where we are on the yield ramp with XPoint we would expect a spend level associated with a good yield ramp as we think there will be fewer roadblocks to getting to yield as compared to bleeding edge geometries

10nm in the “promised Land”?
The expectation has been that 10nm would be produced in Israel. There hasn’t been a lot going on there but we would expect that to change throughout the year as well. Although not starting from scratch as with the Dalian facility, we think the spend level to get 10nm up in Israel would be higher than average as we would expect a lower than average reuse rate there.

PCs probably holding their own
While probably nothing to write home about, PCs related processor sales have not been dropping as fast and continue to show some positive signs of stabilization.
We would caution investors not to get their hopes up for some sort of resurgence and be happy that things aren’t falling off as fast as a year or two ago.

Modest holiday expectations…
Our very rough initial look at leaked “black Friday” sales ads seems to show less PCs as part of the sales than in previous years where whole pages of circulars were dedicated to PC’s of all sorts.

The always impressive Walmart ad last year had 4 Intel laptops, 2 AMD laptops, 1 AMD desktop, an Intel 2in1 and a Windows 10 Intel tablet. This years ad had a paltry 2 Intel laptops, 1 AMD laptop and an Intel 2in1 (interestingly no Wintel tablet). This is a cut of more than 50% from nine X86 devices on sale to just four this year. If this is an early indication of holiday PC sales, we wouldn’t get too excited or set our hopes too high. We would expect Intel to set a relatively low expectation for consumer level PC processors sales and happily an even lower expectation for tablets. There is no incentive for them togo out on a limb at the analyst day.

We think this is pretty much baked into the numbers and as in previous quarters we expect the story to continue to shift to the datacenter/cloud/corporate spending.

No near term threat to cloud/server…
We see no reason not to assume that server based processors will continue their strong performance. There doesn’t appear to be anything on the horizon to change the longer term positive outlook. There may be some near term chop associated with macro economy spending but spend on the cloud and servers appears to be more resistant to these issues than many other areas.

Modem could have upside…
We continue to view the modem business as one of the better segments for potential upside although its still a small piece by relative comparison. We do expect some steady progress on this front and would hope that Intel has something to share in this regard on analyst day

Margins could be a bit soft in future…
Given the likely increased spend and costs to ramp 10nm and other products we wouldn’t be totally surprised to hear talk of some margin pressure going forward. This is all part of the normal product ramp up cycle and Intel probably has more products in ramp stage right now than usual.

Still buyers of the stock…
Since turning positive on the shares of Intel in the mid $20s, we continue to view the shares positively. They seem to have continued to make reasonable progress and could see the mid thirties post analyst day as we think there is little negative news left and mainly upside from here.
As we have seen in other semi stocks, once the bad news is flushed out the stocks tend to bottom out then bounce a bit and the settle in a bit until better news starts to flow, where is where we seem to be with Intel right now.

M&A Mania- Deal of the week club…
It seems as if we hear about another semiconductor M&A deal every week now. We had joked in our April fools issue in the spring that Intel had an “Ordinal” M&A strategy, that is starting at the letter “A” and working its way through the alphabet. The only problem we see is that companies are getting picked off at such a prodigious rate that prices will continue to rise. Couple the feeding frenzy with a new predator from China swimming in the semiconductor waters and we will likely continue to see semiconductor stocks bid up as scarcity becomes an issue.

At this point given all that has gone on it now appears that Altera could be viewed as a more attractive deal as compared to when it was first announced. We can only imagine that Intel may follow up the Altera deal with something else as the merger frenzy seems far from over and there are still plenty of good targets that make a lot of sense and Intel certainly has the firepower too it.

See results in comment section…

Robert Maire
Semiconductor Advisors LLC