Bernstein Advises Broadcom to “Avoid” Intel’s Fabs as Cantor Fitzgerald Predicts IFS and DesignCo Split is a “Sure Thing”

This article should not be regarded as investment advice. The author does not hold any positions in the stocks mentioned.

Current Developments in the Semiconductor Industry

Recent days have been rife with speculation surrounding Intel’s future and the potential roles of key industry players such as TSMC and Broadcom (AVGO).Analysts on Wall Street are actively providing insights as the situation continues to evolve.

Potential Partnership with TSMC

Last week, Tristan Gerra, an analyst at Baird, referenced “discussions from the Asia supply chain”in an investment note. He indicated that Intel may be shifting toward a closer partnership with TSMC to rejuvenate its struggling fabrication units.

“The fab could be spun off into a new entity jointly owned by TSMC and Intel, and run by TSMC.”

Broadcom’s Interest in Intel’s Fabs

In addition, Broadcom is reportedly interested in Intel’s fabrication capabilities to strengthen its own ASIC design operations. However, revitalizing these fabs will demand considerable investment in both capital and talent, particularly for the advanced sub-2nm technology nodes.

TSMC’s Stake in Intel’s Foundry

Recent updates suggest that TSMC may potentially acquire a 20% stake in Intel’s foundry unit. This could materialize either through direct cash investments or technology transfers. Furthermore, sources indicate that Broadcom and Qualcomm could facilitate such a deal by placing large orders with Intel’s fabrication facilities.

Analyst Insights on Intel’s Strategic Moves

C. J.Muse from Cantor Fitzgerald has increased Intel’s share price target from $22 to $29, while maintaining a neutral rating on the company. He explained the complexity surrounding Intel’s situation:

“The situation at Intel is extraordinarily complex, but where there is smoke, there is typically fire, so we do believe the news reports that suggest a split of DesignCo/IFS is a done deal.”

Muse emphasizes that the current U. S.administration is keen to avoid a scenario reminiscent of General Motors’ past difficulties. He believes TSMC will likely emerge as the “most logical manager”of Intel’s fabrication facilities.

“We believe the current Administration is worried about lack of leadership and current net leverage at Intel (have not found new CEO; negative FCF) and does not want a GM like situation to emerge for the US’ Crown Semiconductor Jewel.”

Potential Strategic Deal with Broadcom

On a different note, Bernstein analyst Stacy A. Rasgon expressed reservations about Broadcom’s involvement with Intel’s fabs but noted her interest in potential product collaboration. She argues that while Intel’s x86 divisions (CCG, DCAI, and NEX) are under pressure, they still generate substantial revenue.

“We would recommend an all-stock deal if possible. At a ~75% premium (~$40 take-out price, or a mid-high teens multiple) our rough math suggests 20%+ accretion even in a 100% stock scenario, and with very manageable leverage (well under 3x) across a wide range of capitalization structures.”

Challenges Surrounding Intel’s Fab Spin-Off

Despite the optimistic projections, not all analysts share a positive outlook. Vivek Arya from Bank of America stressed that any attempts to divide Intel could prove to be cumbersome and complicated. He cited several key challenges:

Extensive global regulatory approvals due to Intel’s large market share in PC and server CPUs.
Disparities between Intel’s and TSMC’s manufacturing processes.
TSMC’s ongoing expansion efforts in Arizona to serve AI clientele.
Broadcom’s heavy debt load totaling $58 billion.
Limitations associated with Intel’s CHIPS Act funding, which requires a significant ownership stake in manufacturing.

Furthermore, Lynx Equity raised concerns about TSMC’s motivation to invest in Intel’s IFS, given the current excess fab capacity and Intel’s past inefficiencies at advanced nodes. They suggest that rising tariffs on semiconductor imports might be a driving factor behind TSMC’s interest, albeit they theorize that recent media speculation could merely be trial balloons.

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