What’s wrong with Intel Stock?

Intel (INTC -0.47%) was one of the most innovative tech companies — if not THE most. In 2000, it was among the world’s largest companies by market capitalization and dominated the semiconductor market with its vertically integrated design and manufacturing strategy.

In the last two decades, this business model has collapsed. With the rise of design firms such as Nvidia and Advanced microdevices taking market share, Intel went through a long fall from grace. After the stock’s most recent crash, the stock has now posted a negative total return since January 1, 2000 — nearly 25 years of negative cumulative returns for long-term shareholders.

Times are bad for America’s top semiconductor maker right now. What’s wrong with his stock? Should contrarian investors buy the dip? Let’s explore what’s going on with Intel right now.

Losses in market share for Taiwan Semiconductor Manufacturing

Historically, chipmakers designed and built their products. That is, until Taiwan Semiconductor Manufacturing he came The company (known as TSMC for short) operates what’s known as a foundry model: building semiconductors for third-party customers like Nvidia and AMD.

Focusing solely on manufacturing and ignoring design allowed TSMC to move quickly. It also helps that it has earnings from hundreds of design customers that it can reinvest to further improve its chip development.

Starting about 10 to 15 years ago, Intel began to fall behind TSMC because it would not give up on the vertical integration of both computer chip design and manufacturing. The element was TSMC embracing extreme ultraviolet (EUV) lithography systems from the supplier ASMLwhich have been the key technology for recent advances in semiconductors.

Intel has slowly lost market share to design companies running their businesses on TSMC’s manufacturing platform. Even AppleIntel’s Silicon Valley neighbor is now a huge customer for TSMC.

The finances tell the story

Intel’s downfall has been many years in the making. It finally appears in the company’s financial statements. Even though the semiconductor market is booming due to artificial intelligence (AI), revenue has fallen to $55 billion in the past 12 months; it was close to $80 billion a few years ago.

Free cash flow looks even worse. It was negative $12 billion over the past 12 months and has been negative for almost two years. Over the previous 25 years, Intel has always generated positive free cash flow.

Now, with its back against the wall, the company is finally making moves to modernize and compete with TSMC as a foundry. But is it too little too late?

INTC free cash flow; data by YCharts.

The new foundry plans

In the past few years, Intel has finally started to embrace the foundry model and has said it will start making chips for third-party design customers. It plans to spend tens of billions of dollars building new manufacturing plants around the world to better compete with TSMC.

Most will be in the United States and Europe. The US government plans to give it $19.5 billion in grants under the new CHIPS Act, although it has not yet received that funding.

So far, his foundry business is lagging behind. Last quarter, it generated just $4.3 billion in sales and had an operating loss of $2.8 billion. Revenue barely increased year-on-year. To turn a profit on all that capital spending, Intel will need to grow foundry revenue significantly in the coming years; it’s not happening now.

Investors are increasingly pessimistic about Intel owning both the design and foundry segments. The latter business is a long way behind TSMC and needs to act quickly to catch up. So the stock is rising even lower than where it traded in 2000 because there is no momentum with the foundry segment.

Intel is critical to the US government, so it will get a lot of help from this mistake. But the US and other Western countries are also collaborating with TSMC. There is no guaranteed winner in modern semiconductor manufacturing.

Intel shares are down 72.5% from their 10-year high, and the pain may be just beginning for shareholders. The company dug itself a deep hole by not embracing the foundry production model sooner. It is unclear whether it is too late to build a way out. Investors’ best bet is to stay away from the stock until it does.