Intel stuck between foundry and hard place as it searches for new CEO

Intel (NASDAQ:INTC) dismissed CEO Pat Gelsinger, who was a driving force behind improving manufacturing capabilities, including the upcoming 18A node, leaving investors and banking firms divided on the best path forward.

“This is going to be a tough job for anyone to step into (it was a tough situation when Pat showed up, and things look much worse now),” said Bernstein Societe Generale Group analysts, led by Stacy Rasgon, in a note. “The choice for any new CEO would seem to center on what to do with the fabs. But while keeping them feels like deadweight, scrapping them would also be fraught with difficulties around the product roadmap, outsourcing strategy, CHIPS act and political navigation.”

One possible replacement has already been revealed. Lip-Bu Tan, a former Intel board of directors member and CEO of Cadence Design Systems (CDNS) from 2009 to 2021, is on the shortlist of potential candidates, according to a report today by Reuters.

Citi Research believes scrapping the foundry dreams remains the best option, at least in terms of the shareholders.

“We believe Intel has a slim chance of succeeding in the merchant foundry business, and the company should exit the merchant foundry business,” said Citi analyst Christopher Danely, in a note. “We believe if Intel exits foundry, gross margins could rise to the low to mid 50% range and EPS in the $3.00-$4.00 range, which could translate to a $50-$60 stock.”

BofA Securities highlights how the $7.86B CHIPS Act award prevents Intel from fully separating from its foundry business, even if that is in the best interest of the company. Intel must maintain at least 50.1% ownership of Intel Foundry and cannot cede 35% or more of Intel Foundry ownership to a third party if it is listed as a public company.

“INTC continues to cede PC/server shares to Advanced Micro Devices (AMD) and Arm Holdings (ARM),” said BofA analyst Vivek Arya, in a note. “Meanwhile, PC demand outlook remains grim, with Dell (DELL)/HP (HPQ) suggesting a delayed PC refresh cycle into CY25. We also highlight 2H25 costs could get worse for INTC given early start-up costs for its 18A node, which is still to get any external validation from a large fabless customer.”

Intel 18A is a new process node from Intel Foundry designed for high-performance computing and mobile applications. It is expected to help Intel compete with semiconductor stalwarts such as TSMC (TSM) and Samsung (OTCPK:SSNLF). Intel plans to launch it in 2025.

Intel shares were down 4% by late Tuesday morning trading.