Intel’s future may suddenly be in doubt

Shares of chip giant Intel rose more than 9% on Friday (August 30), but the gains weren’t because things are going well.

Intel (INTC) it’s having a rotten year, and the share price reflects the mess. Its shares fell 28.3% in August despite Friday’s big gain. The stock is down 56.1% for the year.

Shares jumped on a Bloomberg News report that the company and its primary investment bankers are talking about how to fix the mess, the worst the company has experienced in its 56-year history.

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Ideas apparently under discussion include splitting Intel’s product design and manufacturing businesses. Another topic: Factory projects could be shelved, Bloomberg said. The report cited sources who “asked not to be identified because the deliberations are private.”

Something must be done

Falling sales in key markets and rising costs for an ambitious manufacturing turnaround have forced Intel to take drastic measures to save cash, The Wall Street Journal reported on August 10.

On August 1, the company reported disappointing earnings. It then said it would lay off 15 percent of its workforce, cut capital spending used to build and equip manufacturing facilities, and suspended the company’s dividend. Intel had been paying a dividend since 1992.

The stock fell 26.1% the next day.

Intel even sold its 1.8 million stake in Arm Holdings (ARM) the preeminent chip design company.

Intel’s percentage loss in August and its decline for the year are the worst performers of any stock in the Dow Jones Industrial Average. The month’s loss was the fourth worst among all stocks in the Standard & Poor’s 500 index, after:

• Super Micro Computer (SMCI) down 37.6%.
• Moderna drug manufacturer (mRNA) down 35.8%.
• Budget retailer Dollar General (DG) down 31.8%.

To add insult to injury, the year-to-date losses are the worst for any S&P 500 stock except Walgreens Boots Alliance (WBA) . Its shares fell 64.6%.

Walgreens was removed from the Dow Jones Industrial Average on February 26, replaced by Amazon.com (AMZN) . There is speculation that Intel could be kicked out of the Dow, possibly replaced by Nvidia (NVDA) .

US President Joe Biden speaking at Intel’s chip manufacturing campus in Chandler, Arizona in March.

Bloomberg/Getty Images

The Rise of Wintel

Intel’s fall from grace has been staggering.

Intel, a critical element in the development of Silicon Valley, was founded in 1968. Under the leadership of the late Andrew Grove, Intel became a major technology force when it joined Microsoft. (MSFT) in creating the chips to power the Windows operating system that powered nearly all non-Apple personal computers in the 1980s and 1990s. Together, they were known as “Wintel.”

Grove was brilliant, aggressive and demanding. He was famous for coining the phrase “only the paranoid survive”. The world knew the slogan “Intel Inside”.

Between 1992 and 2018, Intel was the largest semiconductor manufacturer by revenue, until it was succeeded by Samsung. In January 2020, Intel’s market capitalization reached a record $292 billion.

That was then. Market capitalization fell 68% to $94.2 billion.

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Andy Grove had an obsession

Grove, who died in 2016, had an uncanny ability to detect major changes in business and technology, and believed that Intel should always be flexible enough to move quickly and make the most of them.

But after pulling back, Intel failed to acknowledge two major developments:

• The development of mobile phones, which required smaller chips than the Intel X86 family of semiconductors. These small chips are now largely designed by Arm Holdings.
• The potential and rapid development of artificial intelligence.

Intel still designs and manufactures chips at factories in Arizona, New Mexico and Oregon, but most of its competitors, including Nvidia, now focus on designing chips that are then manufactured by others, notably Taiwan Semiconductor Manufacturing Company (TSM) .

Intel CEO Pat Gelsinger is a champion of the factories, known as foundries, with the goal of making Intel the second largest foundry by 2030. He had the help of big investors like Brookfield and Apollo, and 8.5 billion dollars in grants and $11 billion in loans. from the Biden Administration, who called Intel “a national champion.”

Progress is painfully slow, and Gelsinger’s eyesight may be threatened.

Intel expects to sell $500 million of its artificial intelligence chips, known as Gaudi, this year, according to The Economist. Nvidia ships $20 billion of its chips each quarter.

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