After the CEO stepped down, is Intel's next step a split? TSMC surged in response

Intel CEO Pat Gelsinger suddenly announced his retirement, ending his nearly four-year leadership at the semiconductor giant. During his tenure, Intel's stock price plummeted over 60%, and its market share significantly shrank.

After the news was announced on Monday, Intel's U.S. stock initially rose in pre-market trading. According to Bank of America, Gelsinger's retirement suggests that the troubled Intel may consider a split in the near future.

Bank of America analysts wrote in a report on Monday that Intel is more likely to split its internal chip manufacturing business from its external foundry business, as the soon-to-depart Gelsinger had advocated for their merger and strongly promoted Intel's foundry business (Intel Foundry).

Meanwhile, Intel's arch-rival TSMC saw its U.S. stock surge over 5% on the same day, continuing to rise in pre-market trading on Tuesday. It is widely believed that Gelsinger's departure signals the failure of Intel's foundry strategy.

Rising Star TSMC Takes the Lead, Intel's Former Glory Fades

Intel's biggest problem is that it has lost its position as the "dominant" chip manufacturer, having been overtaken by TSMC as early as 2018. Under the dual pressure from TSMC and Samsung, Intel's situation has deteriorated.

Gelsinger, who has an engineering background, began serving as Intel's CEO on February 15, 2021. During his nearly four-year tenure, Intel set ambitious plans to reclaim its leading position.

Just over a month after taking office, Gelsinger announced plans to open the company's fabs while launching Intel's foundry business and investing over $20 billion in two factories in Arizona.

Until then, Intel was still one of the few companies capable of both designing and manufacturing chips, while companies like AMD and Nvidia could only design chips and outsourced production to TSMC, Samsung, and others.

During his tenure, he announced plans to invest over $100 billion to massively expand Intel's manufacturing scale in the U.S., Europe, and the Middle East. Meanwhile, Intel began developing next-generation manufacturing processes—20A and 18A—expected to narrow the gap with TSMC and Samsung's 2-nanometer technology.

Unfortunately, so far, these plans have not made much progress. To maintain its market share in chips, Intel has been forced to turn to TSMC to manufacture some chips, marking Intel's first reliance on external suppliers.

Splitting the Foundry Business and Fully Embracing TSMC

The board is searching for Gelsinger's successor, with CFO David Zinsner and product division head Michelle Johnson Holthaus appointed as interim co-CEOs However, whoever is chosen as the official CEO will face the same enormous challenges as Gelsinger.

Some believe that the most favorable option for the next CEO is to spin off the foundry business and fully embrace TSMC, just like its competitor AMD. In fact, Intel has already outsourced the production of many current products.

However, spinning off or even selling the foundry division is more difficult than many people imagine.

Intel Foundry is currently under significant financial pressure, losing over $5 billion each quarter, and its fate is predictable once it is spun off. Although Intel itself is the largest customer of its foundry business, this is still not enough to achieve profitability.

Therefore, at least until the 18A technology achieves mass production, Intel Foundry will not be able to secure enough orders to become profitable. It is reported that the 18A technology may not reach the stage of mass production until late 2026.

Notably, Intel products are the only major customers of Intel Foundry, with very few external clients.

This is because Intel Foundry lacks sufficient tools to help third parties design chips suitable for Intel's older technologies, or these tools are only applicable to Intel's older, less advanced manufacturing technologies. Therefore, Intel is not a particularly attractive option for external customers.

Additionally, the spin-off will also face policy obstacles, such as the additional conditions of the nearly $8 billion federal CHIPS Act funding announced last week. Bank of America analysts stated that the financing agreement requires Intel to retain at least 35% of its foundry business.

Bank of America wrote in its report: "Both companies face their own strategic, structural, financial, and competitive issues, with no solutions in sight in the short term." The firm maintains a "underperform" rating on Intel with a target price of $21.

Regarding Intel's future, Wall Street remains cautious.

Edward Jones analyst Logan Purk wrote in a letter to clients on Monday: "While investors may view this (Gelsinger's departure) as good news, we still see evidence that Intel cannot overcome obstacles, whether self-inflicted or otherwise. While a new CEO may bring new optimism, the new leader may face a series of issues that need to be addressed before adjusting Intel's scale."