Shares in leading US chip maker Intel slumped 12% on Friday, marking their biggest one-day fall since July 2020 and erasing all their gains so far this year, after the firm warned of a drop in fourth quarter earnings and lower profitability over the next few years as it invests in the latest manufacturing technology.

While third quarter earnings were in line with forecasts, guidance for the fourth quarter was decidedly downbeat with gross margins likely to be impacted by supply chain difficulties and earnings seen down as much as 39% on last year.

In addition, in order to arrest market share losses to rivals such as Taiwan Semiconductor and regain the company’s leadership in manufacturing, the firm presented an aggressive multi-year capital spending plan.

Next year alone, between $25 billion and $28 billion has been earmarked for investment out of estimated group revenues of around $74 billion. Moreover, the firm expects its gross margin to decline to between 51% and 53% over the next two to three years, well below its usual levels.

Investors, unnerved by the short- and medium-term outlook, wiped more than $26 billion off Intel’s market value to around $200 billion, relegating it to second place behind arch-rival Broadcom for the first time in terms of capitalization.

Chief executive Pat Gelsinger, who was re-hired by the firm in February to improve the appeal of its products and stem the loss of key customers such as Apple, which now makes its own chips, insisted the business would be ‘well  rewarded’ by its investment in manufacturing.

He also predicted the current quarter would be the worst for parts shortages and next year would see a gradual rebalancing of supply, although some items could remain hard to source into 2023.

Several analysts cut their buy recommendation on the stock after the report, with analysts at Morgan Stanley saying the capital spending plan meant ‘underwriting a growth forecast that seems challenging’.

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Issue Date: 25 Oct 2021