US RESEARCH | PUBLISHED BY RAYMOND JAMES & ASSOCIATES INTEL CORPORATION (INTC-NASDAQ) JULY 26, 2021 | 8:27 PM EDT Semiconductors COMPANY BRIEF Chris Caso | (212) 856-4893 | [email protected] Melissa Fairbanks | (727) 567-1081 | [email protected] Underperform 4 New Names, Same Problems Suitability M/ACC Intel hosted its "Intel Accelerated" manufacturing roadmap update Monday evening, detailing their process roadmap through 2025. The presentation laid a path through which Intel hopes to MARKET DATA Current Price (Jul-26-21) $54.31 have achieved parity with TSMC (and by extension, AMD) by 2024, and a goal of process leadership Market Cap (mln) $221,802 by 2025. This is no different from the goals laid out by Intel’s new CEO when he came on board Current Net Debt (mln) $10,552 a quarter ago, but the company did provide more details about how they intend to achieve that Enterprise Value (mln) $232,354 Shares Outstanding (mln) 4,084.0 goal. Attaining leadership by 2025 requires Intel to introduce a full process node improvement 30-Day Avg. Daily Value (mln) $1,362.7 each year for the next 4 years – an aggressive assumption given the production missteps from Dividend $1.39 the past several years. What Intel didn’t disclose were the costs of this roadmap, which we Dividend Yield 2.6% 52-Week Range $43.61 - $68.49 expect them to discuss during the November analyst day. And while there is great uncertainty BVPS $14.76 about Intel’s ability to achieve these targets, what’s less uncertain is a requirement for higher Long-Term Debt (mln) $24,632 capital intensity. In the meantime, we continue to expect Intel to lose share, since even process Long-Term Debt as % of Cap 11% Net Cash per Share NM parity doesn’t justify Intel’s dominant 80%+ share. Net, our Underperform rating reflects the cost and market share challenges we expect over the next several years, and we think the payback KEY FINANCIAL METRICS in 2024/25 is too far away and too uncertain to justify owning the stock now in light of these 1Q 2Q 3Q 4Q challenges. Non-GAAP EPS ($, Dec FY) 2020A Our take: 1.45 1.23 1.11 1.52 2021E Requires annual full node process improvement each year for next four years. It’s notable 1.39 A 1.28 A 1.10 1.00 that intel’s roadmap now calls for a full node migration each year through 2025. At their best, Intel 2022E 0.92 1.03 1.06 1.07 aspired to deliver a new process node every two years. TSMC succeeded in achieving a one-year cadence in 2017/18 with their N10 and N7 nodes, but has dropped back to a two-year cadence 2020A 2021E 2022E Non-GAAP EPS ($, Dec FY) for full node migrations. Intel also has yet to go up the learning curve on EUV lithography, which 5.30 4.77 4.08 their foundry competitors started years ago. Net, Intel’s roadmap is aggressive – but if it weren’t P/E (Non-GAAP) aggressive Intel would have no chance of catching up. Nonetheless, it goes without saying that 10.2x 11.4x 13.3x GAAP EPS ($, Dec FY) the roadmap contains significant execution risk. 4.94 4.04 3.84 Goal for process leadership in 2025. Intel’s roadmap suggests they will be 1–2 years behind Revenue (mln) ($, Dec FY) 77,867 73,510 72,653 TSMC through at least 2H24, when TSMC is likely to launch their N2 node, and when Intel is Source:ThomsonOne,RaymondJames& scheduled to launch their 20A node, both with a new transistor technology (generally termed ssociates.Quarterlyfiguresmaynotaddtofull yearduetorounding. gate all around). Because neither Intel nor TSMC have yet provided performance metrics on Non-GPexcludesstock-basedcompensation these nodes it’s impossible to fully compare them at the moment. Industry analysts at Anandtech andone-timeexpenses. however seem to believe Intel’s I20A node is equivalent to TSMC’s N3 node, which if true would still put Intel 2 years behind TSMC at the time. To be fair, AMD CPU launches have generally been about a year behind TSMC’s lead customer (Apple) in launching on a new node, which means the gap between Intel and AMD is generally smaller than between Intel and TSMC. In the meantime, likely to lose share. It’s no surprise that Intel will be behind TSMC and AMD until at least 2024, at which time there will at least be some argument whether Intel and TSMC are at parity. But we don’t think technical parity supports INTC’s 80%+ market share. And of course there is the very real risk that INTC could stumble in the execution of this very aggressive roadmap. We think that sets up share gains for AMD for many years to come. Please read domestic and foreign disclosure/risk information beginning on page 4 and Analyst Certification on page 5. INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER | 880 CARILLON PARKWAY | ST. PETERSBURG FLORIDA 33716 US RESEARCH INTEL CORPORATION Cost and margins another concern. Intel didn’t discuss the impact of this aggressive roadmap in terms of cost, capex or margins, but is expected to do so at the November analyst day. At the very least, capex has to go up, which will be an impediment to free cash flow for several years, and higher capex would naturally be a headwind for gross margins farther down the line. No mention of using TSMC. Recent industry chatter suggested that Intel would use TSMC for a CPU tile in the late 2022 timeframe, but Intel made no mention of that during the presentation. Industry chatter on Intel’s use of TSMC has been wrong for a while, and it’s still unclear if Intel has engaged with TSMC in any meaningful way. It’s clear however from tonight’s presentation that Intel is sticking to what they have said previously, that they intend to produce the vast majority of their products internally. Foundry. Intel announced they were engaged with QCOM for the 20a node, their first such engagement under the Gelsinger era. But given that it’s so far in the future, that engagement naturally carries significant uncertainty. Since QCOM already uses both TSMC and Samsung, it makes some sense they would be interested in Intel, and there is little risk in QCOM engaging with Intel. We of course would expect QCOM to maintain their engagements with both TSMC and Samsung even though they are engaged with Intel, and we wouldn’t expect that QCOM has made any commitments. But that also underscores our earlier view, that process parity or leadership is a prerequisite for Intel’s foundry business, since the existing 10nm processes are simply not competitive on either performance or cost. While the charts below provide a generational comparison of Intel vs. TSMC / AMD, Anandtech provided a more in depth analysis of each process node, and based on current performance data, estimates the following equivalents between TSM's existing roadmap and the current Intel plan, beginning with a matchup between TSM's N7 (7nm) node vs. INTC's I7 (10nm+) through TSM's N2 vs. INTC's I20A. Source: Anandtech, Company Reports. Source: Anandtech, Company Reports. Intel announced the following updates to the process roadmap, all generally consistent with prior expectations. We provide a chart comparing the roadmaps of Intel vs. TSMC / AMD on the following page: ● 10nm: The name for INTC's 10nm process node will remain unchanged, and consistent with commentary last week, the company continues to ramp 10nm across three fabs and has now reached bit crossover with 14nm. ● 10nm+: Now renamed "Intel 7," the enhanced 10nm node is on track for production in 1Q22. INTC estimates a 10-15% performance per watt increase over 10nm, with additional transistor level optimization providing what INTC estimates is equivalent to a full node improvement. ● 7nm: Now named "Intel 4" and the first to deploy EUV. On track for production beginning in 2H 2022, with products shipping in 2023, including Glacier Lake for client and Granite Rapids for server. ● 5nm: Renamed "Intel 3" and scheduled for production in 2H23, INTC estimates an 18% transistor performance increase over Intel 4. ● Intel 20A: Scheduled to begin production in 1H24, INTC's "20A" node is the first generation of an entirely new transistor architecture since FinFET in 2011 - importantly, INTC expects to reach parity or "parity plus" with industry leaders (TSMC) by the 2024 timeframe. Notably, the company is engaged with QCOM for a foundry services partnership beginning with the 20A node. PAGE 2 OF 11 US RESEARCH INTEL CORPORATION . Source: Company Reports, Raymond James Research. PAGE 3 OF 11 US RESEARCH INTEL CORPORATION COMPANY DESCRIPTION $75 5000 Intel Corporation, headquartered $70 4500 in Santa Clara, California, is the $65 $60 world`s largest manufacturer of 4000 semiconductor devices. The company $55 $50 provides computing solutions for 3500 the datacenter, PC, automotive, $45 and memory markets, as well as 07/20 10/20 01/21 04/21 07/21 communications and networking INTC S&P 500 components. Company Citations Company Name Ticker Exchange Closing Price RJ Rating RJ Entity Advanced Micro Devices, Inc. AMD NASDAQ $91.82 MO2 Raymond James & Associates QUALCOMM Incorporated QCOM NASDAQ $143.50 SB1 Raymond James & Associates Pricesareasofthemostrecentcloseontheindicatedexchange.SeeDisclosuresectionforratingdefinitions.StocksthatdonottradeonaU.S.nationalexchangemaynotberegisteredfor saleinallU.S.states.NC=notcovered. 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