Intel Shares Surge on Manufacturing Plans, What Does it Mean?

Intel NASDAQ: INTC shares were up 6.6% after the bell after the chipmaker announced plans to increase its manufacturing capacity. The company disappointed investors in 2020, with shares closing down nearly 17% for the year. But 2021 has been a different story; if shares hold the after-hours gains, they will be up more than 35% since the calendar turned.

The appointment of Pat Gelsinger to the CEO role on January 13 coincides with the share price reversal. Before Gelsinger took over, the chipmaker was languishing. One of the company’s biggest problems was a defect-driven delay in the development and release of their 7-nanometer processors. In July 2020, Intel announced that it was running 12 months behind its previous estimates, and the chips wouldn’t be available until late 2022. At the earliest.

For comparison, top rival Advanced Micro Devices NASDAQ: AMD came out with its 7-nanometer processors in the summer of 2019. Intel didn’t offer an update on the timeline for its chips, but committed to making a massive investment that should ultimately push up the release.

Intel is Planning to Invest Up to $20 Billion in Manufacturing

Intel spent $14.3 billion on capital expenditures in 2020. Before Tuesday’s release, analysts were modeling $14.69 billion in capex in 2021 and $15.06 billion in capex in 2022. Capex was essentially forecasted to rise at the same rate as inflation. Understandable.

Yesterday, Intel announced that it will invest $19-20 billion in capex in 2021. The money will go towards building two new manufacturing plants in Arizona, and Intel could announce more expansion plans later this year.

Moreover, Intel may start using more third-party manufacturing plants. This came as a surprise because back in January, Gelsinger tempered expectations that Intel would do that. The move to third-party plants may not come until 2023, but that seemed to be enough to satisfy investors.

If the $20 billion figure sounds high, it’s because it is. Intel’s capex is likely to come in at more than 25% of its revenue in 2021. You have to imagine that the company will keep capex at a similar level in 2022 as well. But with AMD and other chipmakers threatening Intel’s market share, the company has no choice but to open its coffers.

With that said, revenue likely won’t impress in 2021.

 In yesterday’s release, Intel provided a forecast for full-year 2021 after not offering an outlook in its previous earnings report.\

The company is expecting revenue of $76.5 billion, just shy of analyst estimates of $76.64 billion. Intel is forecasting adjusted EPS of $4.55 a share vs. expectations of $4.78 a share.

It’s hard to say how the market reacted to the 2021 outlook. Would shares have been up 10% after-hours if the company hadn’t provided the forecast? Or were investors just happy to get an idea of where Intel’s numbers will be in 2021?

Obviously, it would have been ideal if Intel’s forecast had come in at or above consensus estimates. But at the same time, we’re not talking about a high-flying growth stock that is expected to beat estimates every quarter. Intel has struggled in recent quarters, and investors’ expectations couldn’t have been too high.

You also have to figure that the market is taking the long view. Turnarounds don’t happen overnight. Investor expectations could rise in 2022 and 2023 though.

Will Intel Thrive in 2022 and 2023?

Intel’s numbers will almost certainly improve over the next couple of years. But things change fast in the chip industry, so it’s borderline impossible to make a confident forecast that far out.

The good news is that Intel is trading at just 13.3x forward earnings. A small improvement in 2022 could be enough to send shares much higher.

How Should You Play Intel?

Intel is set to open above $67 a share today, which would mark a 52-week high. Shares are actually closing in on all-time highs of $75.81, set during the dot-com bubble.

You shouldn’t be too concerned about resistance from 20 years ago. It’s unlikely that there are many investors who have been holding on for two decades waiting to get out at break-even.

Instead, the reasonable valuation and turnaround prospects have a good chance of pushing Intel to fresh all-time highs.