Intel Replaces CEO with Former CTO; Shares Undervalued

On Jan. 13, Intel INTC announced that Pat Gelsinger will replace Bob Swan as CEO effective Feb. 15. Gelsinger has a rich technology background, having served as CEO of VMware since 2012 and spending the first 30 years of his career at Intel. At Intel, Gelsinger was the firm’s first chief technology officer and also led 14 different microprocessor programs, including key roles in the Xeon (server) and Core (PC) product families. At VMware, Gelsinger was instrumental in transitioning the firm from a pioneer in data center virtualization into a critical component of cloud infrastructure.

When Swan took over as CEO nearly two years ago, we were skeptical of his finance-oriented background; he appeared out of place relative to peers like Nvidia CEO Jensen Huang and AMD CEO Lisa Su, both engineers. As Intel confronts competitive pressures and manufacturing challenges, we think Gelsinger’s technical and engineering expertise will serve the firm well in navigating these uncertainties. Nevertheless, the hire does not immediately rectify Intel’s process technology delays, and we still anticipate an update to Intel’s outsourcing plans during its Jan. 21 earnings call. The shares of wide-moat Intel were up about 8% following the news release and are trading at a more modest discount to our unchanged $65 fair value estimate.

Intel expects fourth-quarter revenue and GAAP earnings to be above its Oct. 22 guidance of $17.4 billion and $1.02 per share, respectively. The firm also noted that it has made strong process on its 7-nanometer process technology. Although we believe Intel will outsource some of its chip production to the likes of TSMC, we don’t think it will completely jettison its manufacturing network. Intel now has three fabrication facilities producing 10 nm chips, and we think it is more likely that its 7 nm fab footprint will be smaller (only on one fab, at least initially).

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