News Intel 2Q24 Financial Results

[Hitman928]

It seems like pricing it however they liked could be fraud to investors. Especially if it can be shown they did so to make one part of their company look more attractive.

I really hope they aren't doing this but have some justifiable metric for determining the price of their intercompany transactions.

Intel said that they are capping how much the foundry can charge internally for wafers based upon competitive pricing. There's a lot of leeway in that statement though. I have my doubts that Intel foundry is charging Intel design what they would if they were truly independent.

 

[jpiniero]

Intel said that they are capping how much the foundry can charge internally for wafers based upon competitive pricing. There's a lot of leeway in that statement though. I have my doubts that Intel foundry is charging Intel design what they would if they were truly independent.

10 nm is so bad that there's only so much you should charge though.

 

[Hitman928]

10 nm is so bad that there's only so much you should charge though.

Do you mean 10 nm or 7 nm (as Intel calls them)? Neither were bad (once you get to at least 10SF), but were behind TSMC's contemporary in density and efficiency as obviously delays made them late to the party. No doubt, they couldn't charge as much as better processes, but I'm just saying that Intel is basically in complete control of how much the foundry can charge design and they are their own contractor and supervisor in this situation, so they can come up with whatever formula they want as long as they are at least in the ballpark of "competitive pricing", even if it's 300 feet away.

 

[Doug S]

It seems like pricing it however they liked could be fraud to investors. Especially if it can be shown they did so to make one part of their company look more attractive.

I really hope they aren't doing this but have some justifiable metric for determining the price of their intracompany transactions.

So long as Intel fully owns both there is no fraud. They could choose to price the wafers at cost and show in their books that they are losing a lot of money on the foundry and making a lot on x86, and that doesn't hurt investors anymore than charging sky high prices for wafers to show a profitable foundry and money losing CPU business. The bottom line for INTC is the same either way.

The only time fraud is possible is when they are preparing to split them into separate ticker symbols. Then Intel needs to have their ducks in a row accounting-wise - and investors would probably demand greater insight than a typical financial report would include so they could fairly price each piece.

 

[gdansk]

So long as Intel fully owns both there is no fraud. They could choose to price the wafers at cost and show in their books that they are losing a lot of money on the foundry and making a lot on x86, and that doesn't hurt investors anymore than charging sky high prices for wafers to show a profitable foundry and money losing CPU business. The bottom line for INTC is the same either way.

The only time fraud is possible is when they are preparing to split them into separate ticker symbols. Then Intel needs to have their ducks in a row accounting-wise - and investors would probably demand greater insight than a typical financial report would include so they could fairly price each piece.

I had bought some INTC after the crash based on the decent margins presented for client group even if the forecast wasn't great. I guess I bamboozled myself by not paying attention to the fact these numbers by business unit could apparently legally be entirely arbitrary. 🤣

Well ... it'll probably go up anyway.

 

[Joe NYC]

Actually, they can price wafers however they want, because It still is a single company.
It depends on which business unit they want to look better. Foundries with smaller loss or the other groups with higher profit, of course revenue will stay the same.

@gdansk didn't think about that, what you said is true considering this is a publicly traded company.

Exactly!

The approach Intel has taken is to value the wavers at very low prices, and by doing so, assign large losses to Foundry.

Incidentally, foundry has hard assets (Fabs).

So the goal is to value "Intel Products" on bases of inflated profits (similarly to other fabless companies), and value "Intel Foundry" based on its assets.

But it seems like no one is falling for it - given Intel stock price.

 

[Doug S]

But it seems like no one is falling for it - given Intel stock price.

Intel's stock price includes both. If one company has one subsidiary valued at $200 billion and the other subsidiary is carrying $100 billion in debt, it would be no different than a company with two subsidiaries each valued at $50 billion. An investor who couldn't see that should stick to buying mutual funds or indexes rather than individual stocks.

 

[gdansk]

An investor who couldn't see that should stick to buying mutual funds or indexes rather than individual stocks.

🤔 I do that too. But it really isn't illegal to have deliberately misleading accounting? Could AMD legally have the client group buy some MI300X accelerators from DCG at ridiculous prices to make the DCG financials look better? For whatever reason growth in AI segments is valued higher by investors so it seems to me that transaction would be deceptive even if at the end of the day the overall corporate results are correct.

 

[Joe NYC]

Intel's stock price includes both. If one company has one subsidiary valued at $200 billion and the other subsidiary is carrying $100 billion in debt, it would be no different than a company with two subsidiaries each valued at $50 billion. An investor who couldn't see that should stick to buying mutual funds or indexes rather than individual stocks.

I think the trick here is to value the foundry at the value of the assets and ignore the losses. Because, in theory, it might be possible to sell the hard assets of the foundry at that price.

Suppose this were to happen. Intel would get cash for the assets, and the losses would disappear overnight. Then the remaining "Product" division would be valued at the cash + a multiple of earnings of the Products. The key there is the addition of the 2 components.

Intel's book value is (on per share basis) $26.01, and some Intel investors tell me, a big portion of it is value of the hard assets. Intel Stock trading at ~$23 is trading near the value of Intel's hard assets. So, the stock market is not combining the 2 components.

 

[VirtualLarry]

What Intel should have done (and still can) in the consumer domain is swallow their pride and utilize their unique position. They are the only company that has x86 CPUs, GPUs and their own fabs. They should do what AMD did once upon a time. Accept lower margins and start offering gaming SoCs, semi custom even (for consoles and handhelds), and gaming GPUs (DIY, laptop even). But they need to go all in and not just top their toes like they have been doing for so long. Bring a full product range from top to bottom at half the price or lower of what nvidia offers.

The problem (as seen with the MS Surface lineup, and Intel NUCs), is Intel thinks anything they make is "Premium" and priced that way.

 

[Doug S]

🤔 I do that too. But it really isn't illegal to have deliberately misleading accounting? Could AMD legally have the client group buy some MI300X accelerators from DCG at ridiculous prices to make the DCG financials look better? For whatever reason growth in AI segments is valued higher by investors so it seems to me that transaction would be deceptive even if at the end of the day the overall corporate results are correct.

There's a line where there's fraud, and maybe your example crosses it (it would probably depend on if they tried to make their financials more opaque to hide this) but they don't need to do that to get the effect you suggest. They just have to allocate costs differently. The client group ships many GPUs and SoCs with GPUs - and are now shipping SoCs with "AI". So if they wanted, they could legitimately allocate essentially all R&D for GPU/AI chips to the client group. Companies do that sort of thing all the time, for reasons both legitimate (i.e. maybe GPU cost has always been assigned to the client group since that's where all GPU development has been until very recently) and shady (trying to take advantage of the AI hype like you mention)

The problem would come when investors in a call want to know what level of R&D the DCG is doing now and in the future on AI, and if the answer is "none", that's gonna a raise a lot of uncomfortable follow up questions. If the answer is anything other than "none", then we've 100% for sure crossed way over the fraud line!