Wednesday, December 12, 2012 3:11:48 PM
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Intel: Goldman Sees Margin Hit if They Took Apple’s Foundry Biz
By Tiernan Ray
Goldman Sach‘s James Covello late yesterday reiterated a Sell rating on shares of Intel (INTC) in a note to clients that wades into the discussion over whether the chip giant might get some of Apple‘s (AAPL) contract manufacturing business away from Samsung Electronics (005930KS), a prospect, he writes, that should concern investors if it were to come to pass.
Writing that he has been fielding “a significant amount of investor interest regarding Intel becoming Apple’s foundry given Intel’s current excess capacity and Intel’s manufacturing ability,” Covello goes on to opine that getting Apple’s business would be bad for Intel’s gross margin, at an estimated 25% to 30%, or what he deems a “drag of about 400 basis points” to Intel’s gross margin, on a blended basis with the rest of Intel’s business. That’s assuming total revenue of perhaps $8.9 billion come 2016, if it were to happen.
Covello relies in part on estimates from Goldman’s Samsung analyst, Michael Bang, who predicts Samsung will see as much as 80% of its foundry business with Apple go away over the next five years.
The rumors about such a deal remind Covello of the bounce Intel saw when it started making NAND memory chips with Micron Technology (MU) in 2005, only to be followed by an 11.5% decline in the three months that followed.
Covello thinks that rather than going after foundry business, Intel ought to just rein in capacity to boost margins:
We believe that Intel should reduce capex and capacity, which should allow margins to recover to 60% plus during the next cycle by keeping its factories full with its own higher-margin MPUs.
Intel’s CEO, Paul Otellini, who is stepping down in May, said in an interview at a Sanford Bernstein conference last Wednesday in San Francisco that Intel is interested in expanding the foundry business, but that it depends on getting the right kinds of strategic customers and not getting paid on the same “cost-plus” basis as Taiwan Semiconductor (TSM) and other contract manufacturers.
Previously: Samsung: Minimal Downside if Apple Walks Away, Says Bernstein, December 10th, 2012.
Intel: Raymond James Cuts to Sell; ‘Gross Margin Nightmare’ Possible, December 5th, 2012.
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