Intel 'a sinking ship right now': Analyst

There's been a few shifting pieces recently in the chip race as companies fight for a spot on the chip sector leaderboard. Taiwan Semiconductor reportedly considering running Intel's U.S. factories, according to Bloomberg. Intel shares pulling back from a jump earlier in the week, where U.S. Vice President J.D. Vance highlighted the importance of U.S.-based chipmakers. Here with the latest on what's ahead in the semiconductor landscape, Baird Technology Desk Sector Strategist Ted Mortensen. Ted, it's really great to have you here because we keep getting these headlines fast and furious today. The latest report that the administration has approached Taiwan Semiconductor about this stake partnership, what have you, with Intel and Taiwan Semiconductor to manufacture chips in the U.S., what do you make of that? Well, Intel's somewhat of a sinking ship right now. They're having a lot of trouble on their 18A foundry node. They just cannot, along with Samsung, that they're really having trouble at the three nanometer range. Now, you take TSM, which is, I would say, the gold plated area of manufactured at these advanced nodes. They're already manufacturing in volume at three nanometer. They've cracked the code at that node and they're really moving to two nanometer, which is the magical node. And the reason why they have such an advantage is that at two nanometers, you get about 15 percent better performance and about 30 percent better power profiles. And when you talk about Gen-AI, you need to be there and Intel's not. So in some respects, the administration's move here is not unexpected. Intel's a national asset, not only from a security standpoint, but manufacturing in the U.S. and they need some help. And TSM is the only one that can render the lifeboat. Ted, is it enough for Intel, though? I mean, you call it a sinking ship. Would this be enough to, I guess, plug the holes in that ship? Well, they've got to get rid of foundry. I mean, it's kind of a boat anchor on their profitability. If they get the 18A node to work, at least they'll be on the same node as AMD is. AMD has significantly beat Intel up, both on the client and the server side. The server side is where they really need to be at that next generation node because of power. And that's where all the gross margin is. So if they can get help on foundry, if you look at Intel's foundry, their largest customer is Intel at the server at the server level, which again carries that high gross margin. They've got to get it right. And they're just not there yet. Ted, is a potential for either a stake sale partnership, whatever it is, with TSM, is that a reason for investors to own Intel right now? It seems to have been this week. Well, I think the weightings, when I talk to portfolio managers, the weightings are very de minimis. So you're really looking at evaluation play. And if you look at the call options that were done early in the week, they're roughly at the twenty five level. This would dramatically increase, I would say, Intel's valuation of getting rid of that foundry business. But TSM is not going to do it for free. The Trump administration has to negotiate a deal with TSM that they get preferential treatment, you know, not only on the on if they do buy the foundry at the price they can buy it at, number one, and then an earn out provision. They're not going to give up the safer count of their IP at the three and two nanometer range. They're just not going to do it. It really puts their model at risk if it's not structured the right way that they truly profit from that combination. Ted, I want to shift gears to another company here. A report out earlier this week that Arm will be launching a new AI chip with Meta as a customer. Curious what you just make of that headline, that report. Is that something that you think overall makes sense for Arm? Are they going to be able to compete in that chip space in that way? It's a great question, too. I mean, Arm is in a, Arm's late here. They're a royalty company that that companies contract with on the royalty basis for their designs. Their designs are fantastic. I mean, if you look what's happening on the PC and also on the data center side and HNAI, a lot of these designs are Arm based. Now, the problem, though, is that they are late. NVIDIA is years ahead of them as it relates to an integrated silicon solution, whether it be networking, whether it be memory, whether it be GPU and CPU. That's going to be a very tough nut to crack. If Arm is going to be successful, they're going to have to be 20 to 30 percent better than any other chip out there. And that's a tall order. The other thing is they are now directly competing with their customers. And that would be Amazon on Tranium and their inference chip, Microsoft, Meta. It's interesting that Meta is going along with Arm and also Google. I mean, a lot of these designs are Arm based. And if Arm gets in the fray here, they're going to be a direct competitor, not only with Qualcomm also. So I don't think it's that clear. And I don't think it's quite frankly, there's there's a lot that we don't know. And from a P&L standpoint, they really don't have a choice. They've got to get in the semi IC space. Ted, I'm curious your take more generally on kind of where we are in this gen and gen AI investment cycle. Obviously, we've just got a lot of big announcements about big, big numbers that the hyperscalers are spending. But, you know, you don't sound very enthusiastic. It's certainly about some of these chip makers. The market, you know, doesn't feel as enthusiastic right now. What do you think? Well, take a look at the like the Microsoft chart or take a look at some of the cloud titans there. They've kind of gone sideways for a while. And I think what's happening in the gen AI area, it's one of the biggest technologies in our lifetime. We're just spending a ton of money. And there's been some advances, not only on the silicon side, but the software stack where if you look at where training pricing and especially inference pricing, if you look and listen to the Palantir call, it's the second quarter that they basically said that inference pricing is imploding. So it's getting cheaper to run these models. And until we baseline and see really what the model is, the unknown is how much these cloud titans are spending. I mean, we're up 50 percent in cloud spend, over 200 billion for the big four in 2025. That's an astronomical number. And I just think for AI really to get going, we're going to have to have a digestion phase and then the market will really, really pivot up to the upside. Ted, we've talked AI chips for five minutes here and we haven't really talked about NVIDIA. I can't let you go without asking you about it. Overall, where do you feel like sentiment is at with that name and to sort of what you were talking about there? Are we sort of at fair price at this point? And it feels like maybe NVIDIA needs to start doing something a little bit. We need to see a little bit more over the next couple of quarters. Or how are you sort of feeling about that name that I'm sure you get asked about quite a bit? So there's a lot of open questions on NVIDIA from a retail perspective. This is a very, very lazy, long and in some respects, a retail investor is taking a knife to a gun gunfight on what the institutional investors are looking at. This quarter is going to be very interesting. And the reason why is NVIDIA is going through an architectural shift from what's called the old H100, H200 GPU architectures to Blackwell. And there's a there's a server called the GB200, without getting too specific. This is a copper based backplane server that NVIDIA introduced and was supposed to take off. In reality, what we're finding through our research is the hyperscalers want more of this optical solution that's associated with the B300. So they're waiting. And if the hyperscales are waiting on this infrastructure transition, NVIDIA is going to be forced to sell more Blackwell standalone GPUs that will put some pressure on gross margins. To what degree, we don't know. And if you look at the January quarter coming up to be reported in a couple of weeks here, a week, week and a half or so, that comp is up 72 percent year over year where the street is right now. We just have to see them exceed that very difficult comp. And then where the institutional investors are really, really focused is kind of seeing the the the actual print for April. If that exceeds, then I think you're going to see NVIDIA move up and pass the 140 level. But there is there is some real big focus on on on this transition infrastructure discussion on and also gross margins on how that April guide comes in. That's what everybody's waiting for is that April guide. Well, in the meantime, of course, we'll get those earnings on February 26th and see if we get some guidance in how that looks. Ted, thank you so much for your perspective. Appreciate it. Well, have a good have a good weekend. Thank you. Thanks.