- Intel announced in January that it was delaying the opening of its much maligned Fab 42.
- When Intel first announced Fab 42 in 2011, the PC market was still growing.
- The empty building appears to be the result of a serious forecasting error but represents future upside to the company.
"Intel Corporation today announced plans to invest more than $5 billion to build a new chip manufacturing facility at its site in Chandler, Ariz. The announcement was made by Intel President and CEO Paul Otellini during a visit by President Barack Obama at an Intel facility in Hillsboro, Ore." (source)
"Intel announced today that it would delay opening its Fab 42 in Arizona, with no word for when it would finish upgrading the facility and ramp up its production." (source)
Wait, what? I know this is all old news by now. After all, that last announcement happened nearly five months ago. In the internet age, five months is an entire generation. The thing is, it has been on my mind, I've been busy, and my life doesn't always move along at the pace of the internet age.
With speculation like this:
... involving the topic, curiosity got the better of me. As a shareholder of Intel (NASDAQ:INTC) for almost two years, I have read bits and pieces of these developments and wanted to finally put together as many facts as possible.
So here we go:
I'm not going to go back and check, but I'm guessing throughout Intel's history, they have released a number of press releases just like this. After all, the strength of Intel over the years has been equal parts manufacturing, technology and market positioning (to put it nicely). It's instructive to remember what the market signs were just prior to this decision. According to this IDC report, the PC market was already slowing. Of course, that obscures the fact that the same report shows that the top five vendors increased shipments by 13.6% worldwide in 2010. With continued growth like that, a near monopoly player like Intel would need to stay on top of the capacity question or risk giving up that fortress-like market position. Of course, forecasting is not easy.
Situation normal. Construction has started and everybody is suitably impressed.
Expansion with the addition of an on-site R&D center.
This is the first sign of trouble for Fab 42 that I could find. The article mentions manufacturing equipment being diverted to other facilities. IDC's numbers from 2012 show that PC shipments shrank by 3.2% in 2012 after a decrease of nearly 5% in 2011.
Intel elaborated during its 2013 earnings call in January about Fab 42 at some length. The basic takeaway was the confirmation that resources were redirected elsewhere and that Fab 42 was essentially just a shell. Furthermore, depreciation was not affected. This is a telling statement to me since clearly money was spent to build a gigantic building in the desert. My guess is that the intention behind the statement is that depreciation was not/is not/will not be affected much. After all, while the original project scope was for a $5B fab, an empty building (even a gigantic one) does not cost $5B.
So where does that leave us?
In the final analysis, it does not seem like there's anything strange happening in the Arizona desert. Instead of the PC experiencing a graceful decline, it hit a brick wall. As a result, Intel has had to rethink capital allocation plans. Forecasting is hard… especially when you have to do it three years in advance. End of story.
Of course, it is not really the end of the story. Maybe it is the optimist in me, but I see Fab 42 as upside. The reason that I invested in Intel in 2012 was not because the company was executing well (it wasn't) nor because it was conquering new markets (it wasn't). I invested in Intel because the company is the worldwide leader in semiconductor technology and manufacturing. While PC shipments will slowly (or quickly) wash up, the world is going to need more processors, not less, in the future. Not only that, but the world is going to need better processors in the future. Is Intel going to get this turned around this year? No. Next year? No, probably not. For the first time in a decade or so, the company was out positioned in a big way. One of the three legs that Intel built its business around is not what it used to be.
Despite my ownership in the stock, I do not believe it is selling at a favorable valuation for adding more. I did a quick update to my own valuation metric (a free cash flow model) and came up with an intrinsic value of about $27.50 (and since it was a quick update, it probably does not include enough downside risk). Right now, the market appears to be pricing in 5%-plus growth over the next few years. I'm not looking at this as an exact value, however. My goal is to buy into securities at a significant discount to that intrinsic value and hold as long as the qualitative story holds up. So for now, I hold, and I'm hopeful that Intel will find a profitable use for that big building in Arizona.
Disclosure: The author is long INTC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a professional investment advisor nor a financial analyst. I am writing this article because I feel that investing is not a zero sum game for the individual investor and because I believe that the process of writing and receiving feedback improves my own performance.