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Thursday, April 26, 2018

While the Orchestra is Playing
is Intel Corp. on a collision Course with the Iceberg


Intel Corp. (INTC) stock enjoyed a significant rise over the last year+. Today it stands at around $52.35/share, in spite of significant recent corrections in the equities market.

From the PR campaign that Intel CEO Brian Krzanich and his executive staff are running, investors could get the impression that it is smooth sailing, or even better, it is time to take a cruise to an exotic destination and enjoy the sunshine. If you are a short-term investor, perhaps it is time to consider selling your INTC shares and use the proceeds to finance the cruise of your life with your profits. However, if you are more concerned about long-term prospects of retirement, perhaps it would be wise to look at Intel Corp. odds of riding the waves of success, before committing to keep your stock for the long haul.

Note that the latest (2017) Intel Corp. Annual Report (10K) is listing quite a few potential perils on the way to paradise. These (verbatim from the 10K report) include, among other things the following items:
  1. Demand for our products is variable and hard to predict.
  2. Due to the complexity of our manufacturing operations, we may be unable to timely respond to fluctuations in demand and we may incur significant charges and costs.
  3. We face significant competition.
  4. Changes in the mix of products sold may impact our financial results.
  5. We are subject to risks associated with the development and implementation of new manufacturing process technology.
  6. We face supply chain risks.
  7. We are subject to the risks of product defects, errata, or other product issues. 

Intel Corp. is a major player in the global semiconductor business, though it is no longer the leading player (see: Does Intel Corp. PR Hype Truly Compensate For These Facts?). As such the company's exposure to all of the above risk points is very similar to other players in this field. However, for Intel Corp. the main risk factors, into both the near and mid-term future are the ones highlighted above.

Back in 2015, when I had close exposure to Intel Corp. the company already began the experimental R&D manufacturing of 10 nm processes. At the time, the Technology and Manufacturing Group (TMG) had a rosy expectation of driving 10 nm products into high-volume manufacturing, within two years. Note that at the time, Intel Corp was able to ship 14 nm products into the market place; however, with significant yield issues (note Broadwell). While Intel Corp. was able to overcome many of the 14 nm manufacturing yield problems over time, finding solutions to these problems came at a significant cost. Though this cost was really a manufacturing cost, it was actually covered in the books as R&D cost. This explains the rising R&D expenses, reflected in the 2015-2016 annual reports (21.9% and 21.5%, respectively).


While merchant semiconductor Fabs around the world continue to make progress with their smaller geometry high-volume manufacturing, Intel Corp. is essentially standing still. Why did the company stop at 14 nm processes, and continued to use the euphemism of "14+" and "14++" to indicate progress?

My guess is that Intel Corp. has no advantage in pushing its 10 nm process into high-volume manufacturing, due to massive failure of its advanced Fabs to produce the quality level required to show profit from its products, using this manufacturing process. Among other things, over expectations and over reliance on advancements related to EUV lithography, resulted in major disappointments on the executive level. This disappointment led to considerable slow-down of the migration to smaller geometry processes and cautionary fiscal investment in rigging the advanced Fabs.

The mere fact that Intel Corp. 10 nm products are absent from the market, three years after they were "promised", is a clear indication of things going wrong in the navigation path of the Intel Corp. cruise ship. Considering potential loss of Apple business as well as, item number 3 on the list ("competition") above, does Intel Corp. current sailing plan leading, sooner or later to a collision with the iceberg? 

Apparently I am not in a minority opinion on this subject.

See:

--Dr. Flywheel

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