Intel (INTC) is reportedly looking to outsource chip production

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Intel INTC plans to outsource some of its chip production to manufacturers including Korea-based Samsung Electronics and Taiwan Semiconductor Manufacturing Company, according to a Bloomberg report. Intel hasn’t finalized anything yet, the report adds.

Citing familiar sources, Bloomberg noted that Taiwan Semiconductor’s latest facility in Baoshan is expected to be operational before the end of this year. The new facility, which could have more than 8,000 engineers in its research center, could be used for Intel production.

Taiwan Semiconductor and Samsung declined to comment on the matter, Bloomberg added.

However, Bloomberg said Intel’s spokesperson did not comment directly on the matter, but referred to earlier comments from Intel CEO Bob Swan. Swan is likely to provide investors with a detailed strategy regarding the company’s outsourcing plans and efforts to accelerate production technology during the fourth quarter conference call scheduled for January 21, 2020, the report notes.

Intel Corporation Pricing and Consensus

Intel Corporation Pricing and Consensus

Intel Corporation Price Consensus Chart | Quote from Intel Corporation

The news comes hot on the heels of the chipmaker receiving a letter from Third Point LLC, which encouraged management to delve into strategic alternatives to improve performance. Third Point LLC is an activist investor fund founded by Daniel S. Loeb.

Intel is one of the best-known chipmakers in the world, with its share accounting for the majority of the overall chip market. Lately, the company is facing many issues which have hampered its performance.

How is Intel’s performance struggling?

Increasing competition in the server, storage and networking markets is a major concern for Intel. In addition, production delays are persistent overhangs. In July 2020, the company announced a production delay in chips based on the 7 nanometer (nm) process because it detected a major defect mode in the 7 nm process, which caused yield degradation.

Initial production shipments of Intel’s first 7nm in-house data center processor are now expected in the first half of 2023.

The production delays had been highlighted by Third Point in its letter. The letter further stated that Intel’s delay in launching 7nm chips would put the company well behind its Asia-based peers in the first five years of the current decade.

In contrast, Advanced micro-systems AMD is using Taiwan Semiconductor Manufacturing’s 7nm process technology, which will accelerate the time-to-market of advanced 7nm chips.

In the letter, the activist investor firm pointed out NvidiaNVDA’s efforts to strengthen its position in the area of ​​GPUs used in AI applications. Intel’s absence in this area was concerning, the activist firm added.

Loeb also pointed out in the letter the current trend observed in the field of semiconductors. Lately, tech giants like Apple and Microsoft MSFT plans to design chips in-house and leverage the manufacturing capacity of East Asian-based manufacturers. This does not bode well for Intel. Intel should find ways to serve its competitors as customers by providing them with innovative solutions, Loeb said.

The hedge fund also advised Intel to offload “some failed acquisitions” and urgently address its human capital management issues.

Intel’s bloated debt levels are also a concern. As of September 26, 2020, the company’s total debt was $36.56 billion. Cash and cash equivalents, short-term investments and fixed income trading asset balance were $18.25 billion.

All of this was reflected in the company’s share price. Over the past year, Intel shares are down 13.3% versus a 35.9% gain for the industry. By comparison, the S&P 500 gained 18.3% over the same period.

Currently, Intel carries a Zacks rank of #4 (sell).

You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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