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Why You Should Short The Intel Fab Play

Apr. 07, 2021 12:26 PM ETIntel Corporation (INTC)AMD184 Comments
Damon Verial profile picture
Damon Verial


  • Intel has risen on news that it will spend $20B on establishing chip manufacturing factories in Arizona, but this news is more bearish than bullish to me.
  • Investing in Intel now, at a relative high and while earnings are expected to fall, just because of the potential fab catalyst is nonsensical once you consider the full situation.
  • I reiterate my bearish position on Intel and recommend a diagonal put play.
  • Looking for more investing ideas like this one? Get them exclusively at Exposing Earnings. Learn More »

The electronics engineer assembles the chip
Photo by Avalon_Studio/iStock via Getty Images

I previously stated that Intel (NASDAQ:INTC) has no answer to Advanced Micro Devices (AMD), a statement that ruffled some feathers.

I’ve more-or-less officially been an Intel bear for a few months now, and I

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Damon Verial profile picture
Damon Verial is a statistical analyst who uses his skills to research stocks, options, and investment strategies. In addition, Damon is the writer of Copy My Trades, a trade-alert, subscription-based newsletter, available at his personal website. He is also the writer of Exposing Earnings, an in-depth earnings prediction service here on Seeking Alpha. . Damon makes his living as a gap trader, an earnings trader, and an interday trader. In his free time, he writes for Seeking Alpha, where he focuses on seasonal investing, market timing, and earnings analyses. . Damon has written several successful stock analysis algorithms, including algorithms that can predict gap closure, intraday patterns, and news overreactions. They will soon be publically available for subscribers. .Damon’s undergraduate education was in statistics and mathematics at the University of Washington; his graduate education was in psychology at National Taiwan University. He currently lives in Fukuoka, Japan.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in INTC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (184)

Polyhedron profile picture
@aryareaisparsi @st@stockroach sorry for my incomplete thought: Intel is and will be behind in x86 design until 2023, mostly due to its monolithic die approach to server design and its long design cycle. Pat has indicated the return of tic-tok product development approach, which means two staggerd teams in parallel, each design takes twice as long as the product introduction rate. This was practiced to great success in 1990s - 2000s (while Pat was at Intel). Its weakness, though is a LONG time-to-market, and vulnerable to changing requirements. Times have changed, but seems Pat has not.
It's 6:09 profile picture
This author has been short Intel for nearly 35% upside and now recommends a diagonal put play. The hits just keep coming. Clearly little acumen regarding the business.
Comparing an ancient king in Israel to intel makes as much sense as squiggly lines from technical analysts indicating its downfall. Intel if bought a short time ago when it went on sale is a winner. As investors not CEOs we shouldn’t try to think we can run the company better than gessinger who spent 30 years there. He is competent and capable and INTC if bought at the right price is a safely sleep at night winner.
$20B a year to maintain a $20B fab, in capital costs? That’s nonsensical. Try $1B.
@dawgydaddy, try $0B, because in operation it turns a profit, it doesn't need external funds at all. Yes, that was a goofy statement in the article.
MRW.Doddsville profile picture
''You would be better off investing in AMD or TSMC if you want exposure in US chip design or manufacturing.''
Wrong on so many levels, unless you like daytrading your money over to brokers.
@G.Doddsville lol what? How are those day trading stocks? Those are buy and hold stocks that you wouldn't trade, unless you either wanted to lose money, or lose out on potential large gains.

I'd argue intel is better for trading. Been in the same 40 - 65 channel for as long as I can remember :D. Buy at 40, sell at 60 rinse and repeat.

I wouldn't personally do that. But in terms of trading, it's probably more lucrative.
danielaqwe profile picture
I will not get much love with this one...

IMO, the "semiconductor shortage" is exaggerated.
To be sure, the latest and greatest in new chips are always difficult to get. When a circuit designer has a new project, first thing he does is to make sure he can buy the chips. You cannot tell me, that Ford or GMC have designed electronics for their cars and suddenly out of the blue they cannot get them... nonsense.
besides, very few chips are really one of a kind. If you cannot get this one, you design with another one. Worst case you have to make a SW patch or a new PCB.
But even then, electronics inside a car is not really sate of the art (EV is different). The designs are a few years old and the supply chains are planned ahead for month or even years.
Even without a "chip shortage" as a designer or manufacturer you always risk that some other player buys up all the remaining stock and you got nothing.

There are literally millions of different semiconductors and electronic components which find their way into products. But the industry does NOT produce every kind "all the time". Instead, depending on the orders, the fab is configured to make one type for a certain time, then retools and makes a different one. If you do not have stock... you may have to wait for weeks... it never happens, because no manufacturer is so stupid. There is no such thing as "just in time" when it comes to electronic components.

Car manufacturers go along with the "ship shortage myth" because this gives them an excuse to stop the assembly line for retooling for a different model as well as maintenance.

I am an electronics design engineer and have been in this situation many times before. If you are a very large manufacturer, you have planned ahead and if you are a smaller manufacturer (my former employer) you run a new set of printed circuit boards using different chips.... you never shut down the manufacturing because of a component shortage.
@danielaqwe "IMO, the "semiconductor shortage" is exaggerated."
@danielaqwe If you've been following the story. I believe the thesis is that the automakers cut orders at the beginning of 2020 because of the pandemic and assumed they wouldn't sell many vehicles because of it. Their supply went to feed other end markets due to the pick up in the WFH demand.

I guess it turns out that folks don't like sitting on crowded busses in the middle of the plague and vehicle sales rebounded hard but their supply had already been sold out to other buyers and we now have a shortage. DRAM makers and other chip companies don't really care much for the auto market and are instead building inventory to feed the hyperscalers who do their buying in 2H as this is where most of their revenue comes from. Auto makers buy in tiny volumes compared to the cloud guys.

Couple this with crypto demand and you have a severe problem. You can't just build more chips when your fabs are running 100%. Companies like TSMC & Micron have to do their best at estimating demand years beforehand and if they overbuild, they will likely lose money.... See the DRAM oligopoly's wild boom & bust cycles for proof that overbuilding causes massive losses.

Car manufactures wouldn't just idle their plants just for funsies as I would imagine the fixed costs of running said fab are very high and this would only be a last resort. I'm assuming car sales are very strong this year... just anecdotal experience... I traded in my 2018 leased vehicle for a pretty hefty profit. Dealer was willing to buy it from me for $5,000 more than what my contract stated.
danielaqwe profile picture
-- I believe the thesis is that the automakers cut orders at the beginning of 2020 because of the pandemic and assumed they wouldn't sell many vehicles because of it. ---

If your refrigerator is empty, don't call it a food shortage, just because you were too lazy to go shopping.

Semiconductors are made in batches not in a continuous assembly line.
Car manufacturers do not build their own electronics. This is done by contract manufacturers. The PCBs are made by yet another company.
Some of the chips are custom designs (ASICs).
No contract manufacturer, PCB manufacturer or custom chip manufacturer will produce a single piece or even place orders for parts and materials until they have a firm order.
You may be right, F and GM dropped the ball and did not place their orders... sounds plausible because they always behave as their subcontractors should bankroll their purchases.
The "Just in time" manufacturing philosophy is a bit misleading. It only means that the parts arrive at the final assembly plant... just in time.
The orders were placed months in advance.
For long lead times like semiconductors this is even worse.
A custom chip, even after it has been designed takes still 3-6 month from order to delivery.
Purchasing managers just dropped the ball, but don't call it a chip shortage, because this would imply that the cannot deliver chips... they can, but it takes time.... like it always does.
A few years back, there was a real chip shortage, because one of the few manufacturers of chip encapsulation material went up in flames (literally the factory caught fire). We have none of this today.
PauloCostaSilva profile picture
People hate the turtles and love the hares. Turtles live 60+ years, hares don't.
Not every stock is worth holding, not every stock is worth buying. $INTC has been a great asset to me. That philosophy that " a stock that doesn't double or triple in value in 12 months is xit " i don't buy it !!
MRW.Doddsville profile picture
@PauloCostaSilva finally someone with a brain in the comment section
If INTC stands above $67.7, sky is the limit.

Everything is panning out the way I predicted, so far :)
@Spike Capital, well you got it, closed above $68, but it's still within the Bollinger bands on a weekly chart.
@Spike Capital
"sky is the limit."
Nope not after all the " P/E too high " people said AMD was not a buy

Next years earnings are $4.72 so P/E will climb with price
$4.72 X 20 P/E = $94
$4.72 X 25 P/E = $118
$4.72 X 30 P/E = $141
$4.72 X 35 P/E = $165
Rare over 20 P/E almost never over 25 ( last 15 years )
Expect selling by 20 P/E ( too high),
for the same reason people bought at 9 P/E ( too low )
$100 is P/E 21.18 that is the best INTC will do before major selling

Dividend also hurt by higher prices ( all are below inflation )
$1.39 / $94 = 1.47%
$1.39 / $118 = 1.17%
$1.39 / $141 = 0.98%
$1.39 / $165 = 0.84%
@RUBYRUBY3 The thing is I believe Intel will make more than $4.72.
Without comment on the option strategy, which just might work, I will note that the boost to Intel price on the fab news only lasted one day and then vanished. Indeed it may be read as bearish news for the next two years that it will take to complete the new fabs, so some negative plays may work.
OTOH the announcement yesterday of the Ice Lake server chips was reasonably strong and stand a fair chance of a short term surprise on INTC revenues and profits to the upside - at next earnings report, anyway. So take that into account as you construct volatility plays.
TSMC announced their AZ fab last year, not roughly the same time as Intel. The article you have linked is for a bond sale to partly fund it.
stockroach profile picture
opps forgot the link

stockroach profile picture
2nd recent super computer win with Habana chips. Keep shorting Damon
@stockroach He's not even shorting the stock. Instead, he's playing weeklies.

Literally makes no sense because his short thesis is long term but he's actually entering very short term option trades.

There are so many better ways to park the capital...
@Spike Capital good point...shorting with long term thesis...very wrong...
Intel's problem, the stock, I mean, not the business, is that it was so dominant in semiconductor manufacturing for so long that when it had a misstep people seemed to think it was the logical conclusion that it must afterwards suddenly be very bad for an equally long period of time. If Intel had instead been jockeying back and forth with TSMC for years we wouldn't be hearing so much talk about the demise of Intel.

Intel's issues have to do with the insertion of EUV and the breakdown of the methods used to extend immersion DUV. Intel's inability to correct the situation more quickly was due to the exact same issues. Their hands were tied once the initial poor decisions had been made back around 2013 or so, maybe some even earlier. Therefore, the greatest chance is that Intel has not suddenly forgot how to manufacture semiconductors. Rather, as soon as Intel has enough EUV tools and the pellicles they have been waiting for to avoid the throughput-busting methods TSMC uses to enable EUV, the situation gets reset.

Intel 10 nm is going to be a bastard node. 7 nm will get them back on track but it will come out late compared to TSMC's 5 nm, its closest equivalent. After that, things are up in the air as Intel moves to nanoribbons and TSMC stays with finFETs. Although it may turn out to be correct, it's far from a sure bet that TSMC is going to continue with its superiority. Just because TSMC navigated the EUV insertion better does not mean it has superior engineering.

Intel does not need government subsidy to be a semiconductor manufacturing leader. Any subsidy will only provide a tailwind. And the US cannot strategically allow so much American semiconductor manufacturing to take place on an island the CCP is going to attack as soon as it thinks it can win the war to take it. So the tailwind could be brisk.
@matt1685 TSM will most likely move away from FinFET because physically you just have to find another way to build transistor below 3nm.
@Spike Capital Yes they will after 3nm. But TSMC plans on using finFET at 3 nm while Intel plans to use nanoribbons at their 5 nm, which will compete against TSMC's 3 nm.
A repeat of the 10nm mess would have them backporting
5 nm Nanoribbon design to 7nm while TSMC goes ahead again with proven FinFET on 3 nm.
Don't think the market would like a repeat of the last
3 years over the next 5
The smaller we go the harder it is going to get
So to sum up. Short a hot stock in a bull market not to mention it pays a dividend.

Now you know why the author got destroyed.
Chris Lau profile picture
My $INTC PT was $70 for the longest time. It might cross there in days.
And sell $AMD.
@Chris Lau ok will buy AMD now
@freddrick yep I’ll buy AMD on that note
@Chris Lau I do remember that prediction few months back where you had mentioned it will be around $70 by Spring 2021.
Somehow, it stuck in my head and I stuck to INTC since last fall despite being down 15% at one point, no less also because of inherent value calculator you had mentioned in the link. Today, I am up by 30%. Thank you!
Bonjwa profile picture

You came out with that article when INTC was in the $40s. At 10x earnings and 12+% shareholder yield. I took the other side and made 40+%.
I don't own INTC, but the narrative around the stock is crazy. We live in a world where if a company builds a chip, it will go into something. Google, AWS, and Microsoft are going to be constantly building data centers as more and more companies transitions to the cloud and the amount of data saved their continues to grow by companies already on the cloud. We haven't even really seen growth in self-driving, which will require storage of Terabyte's worth of data per day. There are also billions of people without access to internet still to this day, who slowly will gain access to the internet. The semiconductor industry is just going to constantly grow at some rate and INTC will see some share in that growth. I would buy INTC, if I didn't already own NVDA.
bengalesq profile picture
Agree with much of this - speculation of course but seems the logical analysis. That said, it is a cash cow that still has a huge market share. It has gone the opposite direction from what I thought made sense. Its competitors are not better plays however because they represent a completely different type of investment - despite being in the same industry - because of the multiples involved. That said I sit on the sidelines for now - a buyer around 50 and if I owned I suppose I would hold here or sell out half a stake.
Moving forward from Ahab, I take the long view of Jewish history (in which I am considerably influenced by the opinions of Josephus and Gibbon) . So it seems to me that pig-headedness, determination, and go-it-alone have been attributes which have been both helpful and hurtful over the past couple of thousand years. In the more recent period of 1980-2021 both Intel and AMD could be considered to have followed different paths, but with somewhat analogous stubborn virtues and vices. For the next five years, Intel is arguably more in control of its destiny than AMD, which is why I have stock holdings in INTC, and also in TSM.

The determining factor over that period, not mentioned in the excellent article above, is going to be determined by whether state-of-the-art foundries can find sufficiently skillful labor forces to keep yields at a satisfactory level. (This supply factor will control the demand/supply equation, and will dictate pricing and thus profitability for both vendors and customers). Engineering design has tended to produce machines, manufacturing procedures, and quality control factors which are simply too demanding of skills and precision for the available human resources, in the clean-room environment where a speck of dust can ruin a whole production run. Silicon Valley has problems in this regard, Taipei not so much.
Not only is Taiwan close to China but so is South Korea. China could easily convince North Korea to lob a missile into some of Samsung's foundries. So foundries are important to the security of the United States and $20 billion isn't even pocket change to the US government anymore. And it is possible that Intel will actually do a good job manufacturing new processors. It is difficult but others do it, it just takes the right kind of management and know how. They could also get a little homegrown expertise from some Micron employees. So altogether I think there are better places to place your bets.
@PreCambrian dude. taiwan is fulled backed by USA.

Yet to be seen.
Our current comrades will not go to war over Over Taiwan, just bluster. Plus, if China does pull the trigger they will go all the way and take Korea as well. Ultimate goal will probably mean Japan as well. We’ve seen this movie before with another player.
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