Intel shares plummet as new CEO lays out the costs of his comeback plan

Nobody said it would be easy. Or cheap.

New Intel CEO Pat Gelsinger surprised Wall Street Thursday by laying out the financial costs of his four-year turnaround plan for the company, warning of billions of dollars in additional spending and lower profit margins in the coming years.

While Gelsinger promised a big payback, with double-digit revenue growth, investment analysts were dubious. Shares fell nearly 9% and during a conference call Thursday afternoon, the CEO found himself defending his strategy time and again.

“We are positioning the company for long-term growth,” Gelsinger emphasized. “It’s abundantly clear to us that we need to invest in our future now to accelerate beyond the rest of the industry.”

Gelsinger, a former CEO of Intel, returned to the company last winter after a decade with software maker VMware.

Intel was plagued by a series of technical glitches in the years he was gone. Gelsinger’s solution is to re-establish the company as the industry leader it knew in the 1980s and 1990s, allocating tens of billions of dollars to new factories and renewed investment in Intel’s core technology. He also plans to turn Intel into a contract manufacturer, making chips for other companies in Intel’s own factories.

Wall Street has been skeptical, pushing for details on Intel’s spending plans since Gelsinger announced his comeback strategy in March. But analysts hadn’t expected those numbers on Thursday. The company planned to describe them on an investor day in November.

Intel said it has shifted its disclosure plans after Chief Financial Officer George Davis announced on Thursday that he will be retiring next year. That’s why the company postponed its investor day until February, when it plans to choose a new CFO.

Intel said it will spend $25 billion to $28 billion on its factories next year, up from about $19 billion in 2021. And the company said it expects further spending growth in the coming years as it adds two new factories in Arizona, a new factory elsewhere in the US, and another one somewhere in Europe.

(Intel isn’t planning any new factories in Oregon for the foreseeable future, but Gelsinger says it will eventually build more to support new generations of manufacturing technology.)

Gross profit margins, around 57% this year, will drop below 53% for the next two or three years before rebounding.

In return, Intel promised annual revenue growth of 10% to 12% over the next four years, compared to flat revenue in 2021. In fact, Intel has only posted double-digit revenue growth once in the past decade.

Pressed on his predictions, Gelsinger noted that the demand for semiconductors is currently enormous — more than Intel or other chipmakers can meet. And he said that by improving its technology, Intel can charge more for its chips and by adding manufacturing capacity it can meet the market demand.

“We have had a serious shortage of capacity for a number of years now,” says Gelsinger. “Capacity is destiny.”

Investors, already skeptical of Gelsinger, may see the turnaround, bleached at Thursday’s price tag. The stock fell $4.81 in after-hours trading to $51.19.

The uninspiring third quarter results announced Thursday afternoon and the lukewarm outlook for the last three months of the year also weighed on the stock.

Intel said revenue was $19.2 billion. That’s 4.7% more than a year earlier and roughly in line with the company’s forecast. Intel said it expects sales to be around the same level in the last quarter.

Earnings were $6.8 billion, or $1.67 per share. That compares to earnings of $4.3 billion, $1.02 per share, in the third quarter of 2020.

But Intel said sales in its PC group, which had grown rapidly during the pandemic, were down 2% in the quarter. Sales to data centers increased by 10%, but were hampered by supply challenges and new regulations in the Chinese game industry, which reduced demand there.

Intel is Oregon’s largest corporate employer, employing 21,000 people on its Washington County campuses. It’s hiring hundreds more people to staff a $3 billion factory expansion in Hillsboro set to open early next year.

While Intel will be “under pressure for a few years,” Gelsinger said Thursday, he insisted the pain will pay off big in the near term for Intel’s customers and shareholders.

“This is why I came back to the company,” he said. “Choose to invest.”

— Mike Rogoway | [email protected] | Twitter: @rogoway | 503-294-7699