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Why Intel's M&A strategy has this analyst 'a little worried'

Intel’s stock slumped on Friday after the company warned investors about how it would face a chip shortage into 2023 in its earnings report. Anand Srinivasan, Bloomberg Intelligence Analyst, joins Yahoo Finance’s Akiko Fujita and Zack Guzman, to discuss Intel’s earnings, how the chip shortage will continue to impact it, and what to make of the chip space overall.

Video Transcript

AKIKO FUJITA: Let's bring in somebody else who's quite familiar with the space. We've got Anand Srinivasan, Bloomberg Intelligence analyst. And Anand, let's just start with what your breakdown was of the numbers. What stood out to you?

ANAND SRINIVASAN: I think what stood out to me was the steep weakness in the cloud data center business. We had-- our numbers are above the street. We had expected PC strength. We had expected corporate IT server strength.

We hadn't quite expected this strong of a margin impact. But, you know, all that said. And we expect, OK, servers to do well in the second half of the year, both on the corporate side as well as on the cloud side. And that's going to position Intel well given that they still have the market share dominance, although that dominance is becoming less and less as the MBK share.

But if you step back from the numbers and you ask the 10,000 [INAUDIBLE] question is, where does Intel want to be? And does it want to be an IDM? Does it want to be a foundry? Does it want to be a mix of both?

The foundry business inherently is a lower margin business and the chip design business, right? So if you're going to get into that business in a big way, your margins are going to be compressed structurally. So that's point number one.

Point number two is that you haven't been able to write your own house in terms of manufacturing technology challenges. Certainly you expect all this outpouring of customer support for a business that is lagging TSMC and Samsung. And, you know, that's questionable, right?

So we have a sort of a bifurcated series of questions on Intel. Number one is are you going to be able to be competitive with AMD and Nvidia over the next three to five years? And what does that look like? What capabilities do you have? What capabilities do you need to acquire, right, from the design perspective?

Second, will you be able to manufacture or keep up with the advanced manufacturing of TSMC so that you can compete with AMD and Nvidia? If you can't, then that raises questions on the foundry strategy as well.

And then the third set is on the financial profile of the business. Every business Intel struck gold with the data center business. And the cloud took off. And they've been able to satisfy that end market really well. And revenues grew. That's the best gross margin business. And suddenly, AMD has a competitive product in that space.

So how are you going to defend that turf? Any other business that Intel thinks of getting into-- autos, networking, storage, adjacent stuff in the data center-- they all carry substantially lower gross margins than in Intel CPUs through the four servers. So what does Intel want to be in the next iteration? I think those questions are pretty pressing.

ZACK GUZMAN: I think they're pretty impressive. I think investors might be getting a little bit less patient and try to give for Pat Gelsinger some time there to answer those, as he's still kind of relatively new.

Stocks only up 6%, though, year to date. I mean, if you think about that pressure and where they go from here, the GlobalFoundries deal, as reported by "The Wall Street Journal" was interesting just to kind of see that being maybe one of its decisions early on to kind of establish where he wants to take the company.

But, I mean, to your point on maybe margin pressure there and what that could do, I mean, how maybe will that deal if it goes through alleviate some of the pressure and trying to find out what direction he wants to take Intel.

ANAND SRINIVASAN: Yeah, that's a very good question, Zack. The GlobalFoundries deal accelerates or amplifies its Pat Gelsinger's IDM 2.0 strategy, right? They will expand in the foundry business as a result of the GlobalFoundries acquisition.

But if you look at the distribution of capacity of GlobalFoundries and you combine that with Intel, which we have done, is the advanced node capacity isn't there. Globalfoundries walked away from advancing its roadmap into the smaller pitch node. So they're not competitive at all with TSMC.

In fact, Intel might be better positioned relative to GlobalFoundries in many an instant. So while it amplifies its foundry strategy at lower margins, right, it doesn't really address the central question is, how are you going to advance your-- or better your technology roadmap? So that still for us is a head scratcher.

The other thing too is from a margin perspective is TSMC's margins are lower than that of Intel's. The best foundry in the business has weaker gross margins than Intel. So why?

AKIKO FUJITA: Well, they [INAUDIBLE]. It is true even as Intel looks for potential acquisition targets. We heard the company say yesterday, they are moving very quickly on the foundry business. They noted specifically 100 businesses they're speaking to that could be potential customers. So if consolidation really is the route to dramatically or at least quickly ramp up their foundry business, what are some other targets that make sense for you?

ANAND SRINIVASAN: Yeah, I mean, look, from the advanced technology roadmap side of things, TSMC's the only game in town. Maybe Samsung, which is a subscale player in the advanced [INAUDIBLE] [? foundry. ?] And Intel by that token is in the top three, right?

So the question then becomes is that your [INAUDIBLE] sort of widen your scope and say what kind of acquisitions makes sense? Is it the IDM 2.0? Or is it other intellectual property pieces that expand the ice cream sundae flavor potential of Intel?

But wearing my sort of pessimist hat here, Intel has acquired other companies in the past. Altera was a big deal. [? Mobilier ?] was a big deal, the memory business, the [? Infineon ?] modem business.

But they haven't been able to put together a consolidator [? dye ?] to solve a structural problem for the cloud or for any other market. So what gives them the confidence that they're going to be able to do that in the future?

The foundry business is interesting. It allows them to make non-X86 PC and server chips. But they haven't been able to consolidate that intellectual property. Why does it is already well? So I'm a little worried about the M&A strategy or the M&A potential because you have all these different ice cream flavors.

But at the end of the day, you've got to be able to put it together in a nice little sundae with a cherry on top of all the fixings. So and they haven't been able to do that. And that is key in this business.

ZACK GUZMAN: And the shelf life of ice cream, too. You wait too long, it all starts to melt. People start to get even more displeased. That's the other thing about sundaes here too is Pat Gelsinger doesn't have all that much time to continue the metaphor, but appreciate you coming on here to chat with us today. Bloomberg Intelligence Analyst Anand Srinivasan. Thanks again for the time.

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