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Investing.com -- Citi analysts are skeptical about reports that Intel (NASDAQ:INTC) and TSMC are considering a joint venture, arguing that such a move would not be successful given fundamental differences in operations.
Instead, the firm believes Intel should abandon its merchant foundry ambitions and focus on manufacturing its own chips.
"Intel stock is up 7% on a report from The Information that TSMC and Intel have tentatively agreed to form a JV whereby TSMC would operate Intel’s fabs, with TSMC taking a 20% stake in the new company," Citi notes.
However, the bank questions whether such a partnership is viable. "We do not believe TSMC operating/forming a JV with Intel would work given differences in manufacturing and operations."
Beyond operational concerns, Citi also doubts the appeal of Intel's foundry business for potential customers.
"We also question the wisdom of fabless companies investing in this JV," the firm states. "We believe Intel foundry has proven over years it cannot compete with TSMC, and forcing a company to use vastly inferior manufacturing would destroy shareholder value of a fabless company such as QCOM or AVGO."
Rather than pursuing the JV, Citi argues Intel should exit the foundry business entirely. "Given the highly unlikely chance of Intel merchant foundry succeeding and subsequent drag on cash flow, we continue to believe Intel would be best served by exiting the merchant foundry business and focusing on its core CPU business."
Despite Intel stock's recent jump, Citi maintains a neutral stance. "We reiterate our Neutral rating on Intel and maintain our price target of $21.00, or 13X our C26 EPS estimate."
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