Intel's $13bn expansion plans "freak out" investors

Intel announces massive investment in new chip plants, but market watchers aren't impressed

Reuters Barry Collins
18 Jan 2013

Intel's plans for a huge $13 billion spending spree - despite falling revenues - have spooked investors in the chip giant.

Shares of the world's leading chipmaker slid more than 5% in after-hours trading after it projected this year's capital spending at $13 billion, plus or minus $500 million, exceeding many analysts' estimates of about $10 billion.

Intel said $2 billion of its increased expenditures would go toward expanding a facility for researching future manufacturing technology. Some analysts worried that with PC sales already slow, expanding too quickly may create excess capacity that could hurt the bottom line.

"People are starting to freak out about the capex," said Sanford C. Bernstein analyst Stacy Rasgon. "The concern is that if I spend a lot of money and I build up my factories, I don't have enough demand to fill them. They have very high fixed costs, and it pulls your margins down."

"This is a company that is continuing to spend money to participate in the market," said Doug Freedman, an analyst at RBC Capital. That may concern some investors."

Outgoing Chief Executive Paul Otellini, who plans to retire in May after a successor is identified, said the investment in manufacturing would lower costs in the long run. "The leading edge capacity is the lowest cost for us on a per unit basis," Otellini told analysts on a conference call. "Regardless of what you think the size of the market is, the leading edge fabs are the single greatest asset that we have."

Otellini said the higher capex is not intended to bankroll a foundry or contract chipmaking business, but he did not rule out manufacturing semiconductors for other chip companies as long as that did not empower a rival.

This is a company that is continuing to spend money to participate in the market. That may concern some investors

Intel has agreed to manufacture custom chips on behalf of networking equipment company, Bloomberg reported on Thursday. An Intel spokesman declined to comment.

In the fourth quarter, Intel's revenue was $13.5 billion, compared with $13.9 billion a year earlier. Analysts had expected $13.53 billion.

It estimated first-quarter revenue of $12.7 billion, plus or minus $500 million. Analysts expected $12.91 billion.

Tablet troubles

Intel is used to being king of the PC market, particularly through its historic Wintel alliance with Microsoft, which has led to breathtakingly high profit margins and an 80% market share.

But it has struggled to adapt its technology for smartphones and tablets, a market dominated by Qualcomm, Samsung and Nvidia. PC makers are struggling to stop a decline in sales as consumers hold off on buying new laptops in favour of more nimble mobile gadgets.

Microsoft's long-awaited launch of Windows 8 in October brought touchscreen features to laptops but failed to spark a resurgence in sales that Intel and many PC manufacturers had hoped for.

Intel's hefty investment plans reflect its confidence in the future, even as Wall Street worries about the chipmaker's struggle to gain traction in the mobile market.

Intel is expanding its research fab in Hillsboro, Oregon, to develop technology for manufacturing chips on 450mm silicon wafers, a complicated step up from the current 300mm wafer standard.

Larger wafers can translate into big savings because more chips can be etched onto each of them. But building 450 mm plants is expected to be so expensive that only a few industry leaders, including Intel, Samsung and TSMC, are expected to have the necessary scale.

"Our core advantage really is our manufacturing leadership," chief financial officer Stacy Smith told Reuters. "450 will give us a significant cost advantage relative to others."

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