Intel’s Collapse: This Is What Competitive Disadvantage Looks Like

Actions of Intel (INTC 3.51%) fell to a new 10-year low on Aug. 2, but the company’s struggles are nothing new. In fact, there may be no other prominent stock that has underperformed its industry over so many years. The chart below shows how Intel’s track record compares to a popular semiconductor ETF.

INTC data by YCharts.

As you can see, even with the recent decline in chip stocks, a basket of semiconductor stocks would be crushed S&P 500, while Intel has declined substantially during this time. The stock’s plunge on Friday, which comes after most of its peers soared on the AI ​​boom, is due to poor results and guidance. The company laid off at least 15% of its employees and ended its dividend.

That explains the stock’s immediate crash, but there’s a better explanation for the long-term underperformance. Investors talk a lot about competitive advantage, but they often overlook the flip side of that coin: competitive disadvantage, meaning companies lose out to those with competitive advantages. Intel’s challenges and the lost decade provide an example of what competitive disadvantage looks like.

Image source: Getty Images.

To fab or not to fab

Arguably Intel’s biggest mistake, or at least biggest disadvantage, was its foundry business. Unlike peers including I HAVE D, Nvidiaand Broadcom, which aren’t fabulous, Intel owns factories that make chips, although it still outsources some of its manufacturing. You don’t have to worry about manufacturing, which those companies usually outsource Taiwan Semiconductorfreed up resources for Intel’s competitors to focus on design and AMD’s 2009 decision to spin off its manufacturing arm, Global Castersis credited with unleashing its growth over the past decade.

Earlier this year, Intel disclosed a $7 billion loss in 2023 in its foundry business and reported a cumulative loss of $17 billion from 2021 to 2023. It also lost $5.3 billion in the first half of 2024, showing that the challenges in the segment could be welcomed. worse.

The company now has big plans for the foundry business with the help of the US government, but as the numbers show, the business has been nothing but an albatross in recent years.

Meanwhile, foundry leader TSMC has established a significant lead over Intel, which is believed to be a generation or two behind TSMC. TSMC now makes 3-nanometer chips, while Intel’s smallest are 7-nanometer. Even CEO Pat Gelsinger admitted that the company is trying to “bridge the technology gap” with TSMC after “over a decade of underinvestment” before returning to the company in 2021.

Behind the technology curve

In addition to lagging behind fabless chipmakers in product design and TSMC in manufacturing, Intel has failed to capitalize on new technologies and missed out on platform changes. According to internal critics, the company was too complacent to rely on its success on computers, moved slowly and was risk averse.

Intel is best known for its PC chips and has struggled to evolve beyond that area. It missed the mobile market and actually lost AppleIts Macs as a key customer in 2020, a reflection of the fact that the company has fallen behind in manufacturing.

In the PC or consumer market, Intel has generally lost market share to AMD over the years and is at risk of missing out on the AI ​​shift despite the release of new PC AI chips, including Lunar Lake. It also said that its long-awaited Gaudi 3 AI accelerator for the data center is scheduled to launch in the third quarter.

The Gaudi 3 may be Intel’s most anticipated chip in a long time, and the company expects it to challenge Nvidia’s H100 in the data center graphics processing unit (GPU) market. However, Intel’s guidance doesn’t call for a big impact from Gaudi 3, as it essentially forecasts an 8% year-over-year revenue decline in Q3 to $12.5 billion to $13.5 billion dollars in the middle of a weak quarter. a year ago.

It’s far too early in the AI ​​race to call Intel a loser, but its performance so far hasn’t inspired confidence, and that’s duly reflected in its share price.

A major restructuring

Intel surprised investors with news of a major restructuring on Thursday, saying it would cut its workforce by 15 percent as part of a broader cost-cutting plan.

It’s Intel’s biggest restructuring since 2016, and the timing seems complicated. Intel, like the rest of the chip sector, is at a significant pivot point as the industry moves to AI, but the reorganization and layoffs, which won’t be fully implemented until late 2025, could make for a challenging transition and more difficult. .

Intel is cutting its workforce and eliminating its dividend because that’s what Gelsinger believes the company needs to do to catch up with the industry, be competitive and increase profitability. The move seems like a natural result of the company’s years of poor performance, and it’s a huge risk.

While Intel may eventually deliver on the big promises Gelsinger made, it has some huge hurdles to overcome, and the competition isn’t standing still. It will take a lot of work and years for Gelsinger to turn Intel’s historical competitive disadvantages into advantages.