MW Pat Gelsinger was brought in to fix Intel. 3 years later, it still seems like a mess.
By Therese Poletti
Intel investors need to be patient for the turnaround
Turning around Intel Corp., the second-largest chip maker in the world, is taking a lot longer than many investors were counting on - but they need to be patient because the ongoing strategic changes may yet save the company.
Three years ago, Pat Gelsinger, an Intel veteran who was then leading VMware, was brought back as chief executive to help return Intel $(INTC)$ to its industry-leading position, after it had fallen behind Taiwan Semiconductor Manufacturing Co. (TW:2330).
"We have rebuilt our Grovian culture and execution engine," Gelsinger told analysts on the company's earnings call last month, referring to the hard-driving culture Intel was once famous for under the leadership of former CEO Andy Grove.
But it was also apparent how much more work there remains to do.
The company's earnings last week showed slightly disappointing revenue, but its forecast was even worse. Gelsinger has refocused Intel to turn its manufacturing into a larger business, where the company expands its ability to make chips for other semiconductor companies, in addition to making its own branded PC and server processors. But both its earnings and a recent "foundry day" presentation reminded investors that turning Intel into a direct rival to TSMC is going to take a few years.
Also read: Intel foundry losses expected to peak this year after hitting $7 billion in 2023.
"I don't think they are doing the wrong things, but there is no guarantee," said Stacy Rasgon, a Bernstein Research analyst, in an interview. Rasgon, who has a market perform rating on the stock, with a target price of $35, said in a note last week that he believed Intel was "profoundly broken."
"It took 10 years to break it, why would it take less than 10 years to fix it? I am not knocking the strategy, they are probably doing what they have to do, but it's going to be a slog," he added.
More: How did Intel lose its Silicon Valley crown?
Investors appear to not have been prepared for such a long slog. April was indeed the cruelest month for Intel. Its stock fell 31%, in its worst monthly performance since 2002, according to Dow Jones Market Data.
The idea of turning Intel's foundry business into a major revenue-generating business, though, may be the soundest idea for a solid and secure future for the semiconductor giant. Geopolitical tensions, a pandemic and natural disasters have impacted supply in recent years, making it clear that the world needs alternatives to semiconductor manufacturing options in Asia.
"We desperately need domestic manufacturing capacity, in the case of war, pandemics and earthquakes, and we need to make sure we have a strong supply here," said Rob Enderle, principal analyst at the Enderle Group. "It is a significant problem. If China fixes their manufacturing problem and we don't, should another pandemic hit again, we will have massive shortfalls."
Gelsinger was a major advocate to Congress for the U.S. Chips and Science Act, and Intel and many other companies have since received major subsidies to help build manufacturing facilities in the U.S. Intel will receive about $20 billion in funds from the Chips Act: $8.5 billion in grants and $11 billion in loans. Those funds will enable it to expand and build new plants in Arizona, Ohio, New Mexico and Oregon.
It's also wise for Intel to be focusing on growing its manufacturing business, as some of its core processor businesses are potentially under greater competition than ever before. Many internet companies, from Alphabet Inc. $(GOOG)$ $(GOOGL)$ to Meta Platforms Inc. (META) to Amazon.com Inc. $(AMZN)$, are developing their own dedicated server chips, one of Intel's key markets.
Even longtime partner Microsoft Corp. $(MSFT)$ is getting into chip design, though Intel also just announced that it will be making some of those chips for the software giant. The companies did not disclose which chips, but Microsoft recently said it is designing two chips for its cloud-computing services, including one for accelerating AI.
On top of looming new rivals in chip design for the data center, which has often been its faster-growing business segment, there is a new rival in the wings to tackle the PC market, which Intel has dominated for decades. Qualcomm Inc. $(QCOM)$, known for its mobile chips for smartphones, is also developing chips for AI PCs. In its earnings call this week, Qualcomm touted its forthcoming chips that will be adopted by most leading PC makers later this year and into 2025. Its chips are expected to be featured on stage at Microsoft's Build conference later this month. Intel and rival AMD $(AMD)$ are also developing chips for AI PCs.
While the AI PC is in the near future, the hot market for AI accelerator chips is here now, and it's dominated by Nvidia Corp. $(NVDA)$. So far, Intel's entry into this arena, its Gaudi chip, is forecast to reach about $500 million in revenue in the second half of this year. AMD, on the other hand, is forecasting about $4 billion this year for its Ml300 series.
For all the issues Intel is facing, though, Enderle and some other analysts believe Gelsinger is the right person at the helm. Gelsinger had previously dedicated 30 years to the chip giant in various positions, including as architect of one of its earlier processors, the 80486.
"If things go sideways on Intel, it is the manufacturing side that will sustain them," Enderle said. "He is doing the right thing ... he is the only one who knew it well enough to turn it around."
But investors are going to need patience for a very long haul.
Also read: Can Intel's boy wonder pull a Steve Jobs?
-Therese Poletti
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May 03, 2024 08:35 ET (12:35 GMT)
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