BMO Capital analyst Keith Bachman sees Gelsinger's defection to Intel as a "big loss" for VMware
Intel (INTC) has appointed VMware's (VMW) Pat Gelsinger as its new CEO as Bob Swan steps down as chief executive. Following the news, Citi analyst Christopher Danely raised his price target on Intel to $55 and opened a positive catalyst watch on the shares. Meanwhile, his peer at William Blair downgraded VMware to Market Perform as the exit of Gelsinger on the heels of two other key executive departures in recent weeks leads him to worry that changes at the top could create material disruption in the VMware organization and business.
VMWARE CEO JOINS INTEL: Intel announced on Wednesday that its board of directors has appointed Pat Gelsinger as its new chief executive officer, effective February 15, 2021. Gelsinger will also join the Intel board of directors upon assuming the role. He will succeed Bob Swan, who will remain CEO until February 15. Gelsinger has served as the CEO of VMware since 2012.
Intel also noted that today's announcement is "unrelated to Intel's 2020 financial performance." Intel said it expects its fourth quarter 2020 revenue and EPS to exceed its prior guidance provided on October 22, 2020. "In addition, the company has made strong progress on its 7nm process technology and plans on providing an update when it reports its full fourth quarter and full year 2020 results as previously scheduled on Jan. 21, 2021," Intel said. On October 22, Intel said it saw fourth quarter adjusted earnings per share of $1.10 and fourth quarter revenue of $17.4B.
POSITIVE CATALYST, TARGET UPPED: Following the news, Citi analyst Christopher Danely raised the firm's price target on Intel to $55 from $50 and opened a positive catalyst watch on the shares. The analyst called the CEO change "the best possible outcome for Intel" given Gelsinger's extensive semiconductor experience and knowledge of Intel, and sees the stock trading higher temporarily. However, Danely kept a Neutral rating on Intel shares given his view that rebuilding takes time and the company is still likely to lose share "for at least two years" to AMD (AMD).
JPMorgan analyst Harlan Sur also views the management change positively given Gelsinger's track record at VMware, EMC and as the prior head of Intel's desktop and server CPU businesses. Sur also noted that Intel said its fourth quarter revenue and earnings per share will beat prior guidance and that the company has made "strong progress" on its 7nm process technology. The analyst believes Intel will move forward with a hybrid insourced/outsourced manufacturing strategy. Sur has an Overweight rating and $70 price target on Intel shares.
'BIG LOSS' FOR VMWARE: Commenting on the news from the other side, BMO Capital analyst Keith Bachman told investors that he views the move as "a big loss" for VMware. Though admitting he has been critical of VMware for being late with a container strategy, Bachman argued that Gelsinger has been "an important positive guiding force" who "does not get enough credit for playing a meaningful role in balancing the interest" of VMware and Dell (DELL). Overall, the analyst is disappointed that Gelsinger has elected to leave and views this departure as "a net negative" for shares. Nonetheless, he kept an Outperform rating on VMware with a $157 price target.
MOVING TO THE SIDELINES: Following Gelsinger's departure, William Blair analyst Jason Ader downgraded VMware to Market Perform from Outperform. The analyst argued that the exit of Gelsinger on the heels of two other key executive departures in recent weeks - Rajiv Ramaswami to Nutanix (NTNX) and Ajay Singh to Pure Storage (PSTG) - leads him to worry that changes at the top could create material disruption in the VMware organization and business. Ader has also concerns regarding the uncertainty on VMware's future ownership structure and what he calls "uninspiring" discussions in the fourth calendar quarter.
BUY AMD ON INTEL-RELATED PULLBACK: RBC Capital analyst Mitch Steves told investors that he would be a buyer of AMD (AMD) shares into earnings given the pullback after Intel announced that Swan will retire in February and Gelsinger will take the helm. The analyst views this as a best-case scenario for Intel in terms of a change in management and believes it is a notable positive for the company, but unlikely to change the 2021 outlook from a structural and technology perspective. While the new CEO could drive long-term changes 2-3 years out, he thinks the near-term period continues to favor AMD.
PRICE ACTION: In afternoon trading, shares of Intel have gained almost 8% to $57.33, while VMware's stock has dropped about 8% to $131.75. Also lower, AMD has slipped over 3% to $92.40.