Can Intel Corporation Afford This Massive Investment?

Intel is putting $5 billion into upgrading a single manufacturing plant. How can the chip giant afford that kind of investment these days?

May 5, 2014 at 2:00PM

Intel (NASDAQ:INTC) investors haven't seen a whole lot of upside in recent years. The stock has trailed its Dow Jones (DJINDICES:^DJI) peers over the last half-decade. Most of the drop came in 2012, when surging tablet sales promised to put an end to Intel's PC-and-server systems gravy train.

INTC Chart

INTC data by YCharts

Yet Intel has been pumping money into new chip technologies and better manufacturing processes as if the x86 (aka "Intel-compatible") chip architecture would never die. The latest example: Intel just posted a plan to upgrade one chip factory in Israel. And it's a big deal, in every sense of those two words.

The processor giant is about to grow its Israeli investments by more than 50% in a single shot.

Is Intel going insane, or is this simply a savvy plan for future manufacturing needs?

For the svelte sum of $5.8 billion, minus about $1 billion in Israeli tax credits as an incentive to get it done, Intel will add some 1,200 local jobs in construction and chip plant operations. The upgraded facility should pump out next-generation chips with copper traces as skinny as 10 nanometers.

To get a sense of perspective, Intel's best chips today are made on a 22-nanometer process. The traces will shrink to 14 nanometers later this year, when the Broadwell family of Intel Core, Atom, and Xeon chips make it to store shelves and system builders.

The Israeli upgrade won't help Intel until 2016, when 10-nanometer chip designs are ready to meet state-of-the-art manufacturing technologies on that level.

For another kind of context, Intel has spent 40 years in Israel but only invested about $11 billion in that nation so far. So a $5.8 billion commitment is huge, historically speaking.

As it turns out, Intel has only accelerated its manufacturing asset investments in the so-called post-PC era. Capital expenses took a massive leap in 2011 and haven't come down since:

INTC Capital Expenditures (TTM) Chart

INTC Capital Expenditures (TTM) data by YCharts.

But this would be insane only if Intel wasn't getting anything out of its investments. You'll notice that Intel's cash flows have kept pace with those rampant infrastructure budget boosts. In other words, Intel is hardly burning through its cash reserves here.

It's true that the processor market is in a state of flux. Smaller rivals are getting a second wind, completely alternative microarchitectures stole the exploding mobile market, and the same options hope to make inroads in Intel's server and desktop markets as well.

But then, this ain't Intel's first rodeo. More to the point, CEO Brian Krzanich rode this bronco before.

Krzanich is only the sixth CEO in Intel's history. He started as an engineer in 1982 and moved up the ranks on the manufacturing side of Intel's operations. It's safe to say that nobody knows Intel's chipbuilding technologies and manufacturing needs more intimately than Krzanich.

At various stages in his career, Krzanich has seen the birth of the PC, the rise and fall of various non-PC platforms, the specter of third-party x86 chips, and more. None of these killed Intel. Not by a long shot:

INTC Chart

INTC data by YCharts.

Manufacturing excellence has always been the crown jewel of Intel's many treasures. It's what sets the company apart from lesser lights. To maintain this competitive advantage, the company must keep researching and investing in what's next. If Intel ever stopped doing that, I would worry about the company's future because it would mean that its board and executives had given up.

That's clearly not the case today. Krzanich and his merry band see opportunity ahead, and deem it worth another round of multibillion-dollar manufacturing upgrades. As an Intel shareholder, the Israeli upgrade plan strikes me as a good sign.

INTC Revenue (TTM) Chart

INTC Revenue (TTM) data by YCharts

Whether you agree with my analysis or disagree with a passion, feel free to share your thoughts on Intel's rising capital expenses in the comments box below. Investors helping investors think through a thorny issue is always a win-win situation.

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Anders Bylund owns shares of Intel. The Motley Fool recommends and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days.

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