When a company faces no real competition for a long time, complacency inevitably sets in. That's the story of Intel (INTC 5.00%) for much of the 2010s. Advanced Micro Devices, the other half of the x86 processor duopoly, was a train wreck until around 2017. It didn't matter that Intel was running into all sorts of problems on the manufacturing side. The profits kept flowing.
After years of pushing out uncompetitive products, AMD turned the market for PC and server CPUs on its head with its Zen-powered chips. This was partly enabled by Intel's chronic manufacturing delays, and partly by the rapid technological progress made by third-party foundry Taiwan Semiconductor Manufacturing (TSMC). Intel sat idly by as its manufacturing edge slipped away, and AMD took advantage.
AMD has been winning market share, which is particularly problematic in the lucrative server chip market. Meanwhile, companies Apple and others have been able to have their own custom chips manufactured by TSMC using bleeding-edge tech that Intel simply can't match. In all, it's not a good situation for the half-century-old semiconductor giant.
A bold comeback plan
Pat Gelsinger, an Intel veteran who had left to lead VMware, was brought back as CEO in early 2021. It didn't take long for Gelsinger to begin charting Intel's comeback. Instead of abandoning manufacturing, which some had been calling for, Gelsinger doubled down on the business of making chips. Not only would Intel beat back the threat from AMD, but it would also build out its very own foundry business to rival TSMC.
If this plan sounds expensive, that's because it is. To make all of this happen, Intel will dramatically increase how much it spends each year on building and maintaining its factories.
Chart by author. Data source: Intel.
For the past decade, Intel's annual capital expenditures averaged around $12.5 billion. The most Intel ever spent before Gelsinger took over was $16 billion in 2019. Spending ticked up last year as the beginnings of Gelsinger's strategy was put into motion. Starting this year, Intel will be going all out as it works its way back into a position of dominance.
Intel plans to spend around 35% of its revenue, or approximately $27 billion, on capital expenditures this year. This capital intensity will persist through at least 2024, and Intel doesn't expect to be producing any meaningful free cash flow during this time. Only in 2025 and beyond, according to Intel's plan, will it be able to cool off its spending.
Intel has committed $20 billion to build a new fabrication complex in Ohio, and that investment could rise to $100 billion by the time it's all said and done. Whether or not the CHIPS Act, which would provide $52 billion in incentives for the semiconductor industry, is signed into law will dictate how much cash Intel pours into this new facility.
Intel is also investing as much as 80 billion euros into the European Union over the next decade, including an initial 17 billion euros for a fabrication complex in Germany. As in the U.S., Intel is hoping to receive billions in incentives to pay for part of this new facility. The details haven't been ironed out yet, but Germany is reportedly looking to grant Intel around $5.5 billion.
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Key Data Points
The semiconductor industry is in desperate need of more capacity, and Intel's investments will help bring supply and demand back into sync over time. This level of spending is also necessary for Intel to catch up in terms of technology. The company has no hope of landing clients that need the most advanced manufacturing processes if it doesn't offer them.
For Intel investors, the next few years will require a lot of faith. Profits are going to take a big hit, free cash flow will dry up, and the future of the company depends on the success of an audacious plan to spend nearly $100 billion over the next three years undoing its mistakes and building out an entirely new line of business.
Intel needed a bold strategy, and Gelsinger delivered. Now let's see if it works.
