Intel may need to shrink to grow again

Intel (INTC -2.63%)the world’s largest manufacturer of x86 processors for PCs and servers, was once a fixture of the semiconductor sector. But over the past 10 years, its stock has fallen more than 50% as it withered into a less valuable chip maker than AMD, Nvidiaand Qualcomm.

Intel’s fall from grace was caused by manufacturing problems, product delays, lost market share, and discordant strategic changes under three CEOs. It missed the move to mobile chips, focused too much on cutting costs, and kept buying back its own stock instead of solving its lingering manufacturing problems or investing in new chips.

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From 2013 to 2023, Intel’s revenue grew at an anemic compound annual growth rate (CAGR) of 0.3%. AMD, which has outsourced its manufacturing to Intel’s foundry rival Taiwan Semiconductor Manufacturing (or TSMC), had a CAGR of 15.6% over the same period.

That’s why it wasn’t too surprising when a few recent reports said Intel was exploring some drastic options to fix its struggling business. Let’s see if any of those rumored ideas make its stock worth buying again.

What are Intel’s main problems?

Intel is still an integrated device manufacturer, meaning it designs, manufactures and markets its own chips. This sets it apart from no-nonsense chipmakers like AMD and Nvidia, which outsource their production to third-party foundries.

Intel foundries once produced the world’s most advanced chips. But over the past decade, it has fallen behind its two Asian competitors, TSMC and Samsungin the “process race” to make smaller, denser, and more energy-efficient chips.

Intel’s problems began with a difficult transition from 14nm chips to 10nm (2018-2019) and were compounded by further delays in its subsequent transition to 7nm chips (2020-2023). These tedious delays have led many PC manufacturers to replace Intel processors with AMD ones.

According to PassMark Software, which measures PC performance, Intel’s x86 processor market share fell from 82.5% to 61.8% between the third quarter of 2016 and 2024, as AMD’s share increased from 17.5 % to 35.4%.

Unlike TSMC, which has aggressively ramped up its research and development spending, Intel has tightly controlled its capital spending and set aside too much cash for share buybacks and dividends. Bob Swan, CEO from 2019 to 2021, even briefly considered becoming a no-nonsense chipmaker after leading AMD to solve its manufacturing woes once and for all.

Pat Gelsinger, who succeeded Swan, redoubled efforts to expand his primary foundries to catch up with TSMC and Samsung. This was an expensive strategy: Gelsinger expected to offset these costs with government subsidies in the US and Europe, but TSMC also secured some of these government subsidies for its overseas factories.

Does Intel need to shrink to grow again?

After Gelsinger took over, Intel offloaded numerous businesses, including its Optane memory chip, network switching chip, 4G/5G connectivity solutions, pre-built server and cryptocurrency mining divisions. It also continued the multi-phase sale of its NAND memory chip division to SK Hynix, split its automotive chip division Mobileyeand liquidated its remaining shares of the mobile chip designer Arm holds.

In early August, Intel suspended its dividend and said it would lay off 15 percent of its workforce to save up to $10 billion by 2025. Those shock announcements accompanied a dismal Q3 earnings report. the second, which broadly missed analysts’ expectations as the company struggled to ramp up production of its newest Meteor Lake chips.

The latest reports suggest that Intel may spin off or sell its struggling foundry unit. This move would mirror AMD’s spin-off GlobalFoundries in 2009, but it would also completely undo Gelsinger’s original plans.

If that happens, Intel could significantly reduce its expenses by outsourcing all of its production to the new facility or other foundries like TSMC. But taking this drastic step would only make it similar to AMD and subordinate to TSMC.

Other rumors suggest Intel may sell Altera, the programmable chip maker it bought in 2015. But that divestment would erode its defenses against AMD, which acquired and integrated Altera’s main competitor Xilinx in 2022.

Intel only wasted three years?

Intel has not confirmed any of these rumors, but they suggest that it is abandoning Gelsinger’s grand plans to reclaim the process lead from TSMC by 2025. It also appears to be moving back toward Swan’s idea of ​​turning Intel into a fabless chipmaker.

This could correct the business and stabilize earnings growth again, but it also tells us that the chipmaker has wasted a lot of valuable time and billions of dollars over the past three years. That’s why I think Intel’s focus on shrinking its business is actually a glaring red flag that could create tailwinds for TSMC and AMD.