“Citi denies Qualcomm-Intel merger, advises Intel to leave foundry industry”

Source: Davit Kirakosyan

Introduction
A recent report from The Wall Street Journal stirred speculation in the tech industry as it suggested that Qualcomm (NASDAQ:QCOM) had approached Intel (NASDAQ:INTC) about a potential acquisition. However, Citi analysts quickly dismissed this notion, arguing that it would be implausible and counterproductive for Intel shareholders. In this expanded discussion, we delve deeper into the reasons behind Citi’s stance and their recommendations for Intel’s strategic direction.

Challenges of Qualcomm Acquisition
Citi analysts raise concerns about Qualcomm’s lack of experience in operating semiconductor fabs, which could pose significant challenges if they were to take over Intel. Operating semiconductor fabs requires specialized knowledge and infrastructure, and transitioning into this business segment can be complex and costly. Additionally, Qualcomm’s historically high operating expenses may not align well with Intel’s operational structure, potentially leading to inefficiencies and financial strain if a merger were to occur.

Intel’s Foundry Division Woes
According to Citi, Intel’s foundry division has been grappling with substantial financial losses, posting a staggering $2.8 billion loss last quarter and projected to lose approximately $8 billion annually. The analysts argue that the foundry business, which involves manufacturing chips for other companies, does not offer significant profitability potential for Intel. As a result, divesting from this segment could alleviate the financial burden on Intel and pave the way for improved performance in other areas of the business.

Financial Impact of Exiting Foundry Operations
Citi estimates that abandoning the foundry operations could have a transformative effect on Intel’s financial metrics. By divesting from the struggling foundry business, Intel’s earnings per share (EPS) could see a substantial boost, potentially reaching levels between $3.00 and $4.00. Additionally, gross margins are expected to improve to the low-to-mid 50% range, enhancing overall profitability for the company.

Retaining CPU Manufacturing Business
While Citi recommends divesting from the foundry business, they emphasize the importance of retaining Intel’s core CPU manufacturing operations. The analysts highlight the synergies between CPU design and manufacturing, underscoring the strategic advantage of maintaining in-house production capabilities. Rather than transitioning to a fabless model where chip design is outsourced for manufacturing, Citi believes that Intel can leverage its expertise to remain competitive in the market.

Future Outlook for Intel
Looking ahead, Citi anticipates that Intel will face continued pressure on its EPS as long as it persists in operating its struggling foundry business. The analysts express skepticism about the prospects of this segment becoming a successful venture and underscore the need for strategic realignment to drive sustainable growth and profitability for Intel. They project that by focusing on core strengths and shedding non-core assets, Intel can position itself for success in a rapidly evolving semiconductor landscape.

In conclusion, Citi’s analysis offers valuable insights into the challenges and opportunities facing Intel, shedding light on potential strategic directions that could enhance the company’s long-term performance. By heeding these recommendations and making strategic decisions aligned with its core competencies, Intel may chart a path towards renewed growth and competitiveness in the semiconductor industry.

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