Ed Lin
Intel stock has been sliding under CEO Pat Gelsinger, erasing the performance-based equity awards he was granted when he became the chip maker's top executive. If shares don't assume an Nvidia-like trajectory soon, he stands to see more than $100 million in paper value wiped out.
Since Gelsinger became Intel CEO on Feb. 15, 2021, shares have dropped 63% to $22.68 at Friday's close from $61.81.
Shares of the chip maker have lost more than half their value for the year to date alone, and set a multiyear low of $18.51 on Sept. 10. Intel stock last traded below $19 in October 2010.
Gelsinger didn't comment. In response to a request for comment, Intel said in an email, "Intel has a strong pay-for-performance philosophy, including executive compensation programs that have a heavy emphasis on incentive-driven pay tied to Intel's financial and operational results and the creation of stockholder value."
Gelsinger's appointment as Intel's head marked a return after an earlier stint that saw him rise to senior vice president and general manager of the Digital Enterprise Group before leaving in 2009. After spending a stint as CEO of VMware, he returned to Intel, "where he previously spent 30 years of his career, learned at the feet of Intel's founders, and served as our first Chief Technology Officer," Intel noted in storybook fashion its 2022 proxy form.
Intel's original CEO offer letter included a base salary of $1.25 million, an annual cash bonus target of $3.44 million, and a cash hiring bonus of $1.75 million. The equity awards component included restricted stock units and performance stock units with a target value of about $110 million, "with almost 75% of the award's target value requiring significant stock-price appreciation in order for the awards to be earned." Gelsinger's cash bonus in 2021 actually came to $4,904,300 after a 142.67% adjustment for hitting a revenue goal, a net income goal, and for performance in operational goals in One Intel -- a company strategy that emphasizes team success.
In July 2021, Gelsinger told us that Intel could reclaim its technology lead by 2025, and that top engineers who left Intel in recent years were returning. "They feel the mojo coming back," he said.
But the mojo vibe was a headfake. Intel stock eked out a 3.4% gain in 2021, while the iShares Semiconductor exchange-traded fund, or SOXX, soared 43%, and the S&P 500 index rose 27%.
Shares essentially traded sideways in 2022 until the end of the first quarter, when they began to slide, eventually ending the year 49% in the red, compared with a loss of 36% in the SOXX, and a 19% drop in the S&P 500. By November of that year, Intel announced that the compensation committee of its board and Gelsinger agreed to adjust three of his equity grant agreements "to further strengthen the alignment of Mr. Gelsinger's new hire performance-based equity awards with his commitment to long-term stockholder value creation." Essentially, they raised the bar for stock performance to get the awards.
Gelsinger's cash bonus for 2022 was $945,900, less than a fourth of the previous year's, and his stock compensation was $8.9 million.
The next year, 2023, was a banner year. Intel stock rocketed 90%, trouncing the 66% rise in the SOXX and 24% gain in the S&P 500. The biggest annual percentage gain in 20 years for the shares was fueled by strong earnings, upbeat guidance, and the perception that the Intel Foundry strategy -- making chips for other companies, as an alternative to Taiwan Semiconductor Manufacturing -- was paying off. Gelsinger's cash bonus rebounded to $2.9 million, while his stock compensation rose to $12.4 million.
Then 2024 happened. On Jan. 26, shares dove 12% to $43.65 after Intel issued a grim outlook that overshadowed a strong fourth-quarter report. One quarter later, Intel again provided disappointing guidance, and shares dropped 9.2% to $31.88 on April 26. The next and latest quarterly report sent shares plunging 26% to $21.48 on Aug. 2; the bottom seemed to have fallen out and the unwelcome news dumped on investors included lackluster second-quarter earnings, a disappointing outlook, a suspended dividend, and big layoffs. Intel stock was already more than 40% in the red for 2024 before the announcement.
We noted that Intel "simply hasn't kept up on the product front," after the report.
Intel shares have rebounded slightly since on some upbeat headlines, including a pact with the U.S. Department of Defense, and a partnership with Amazon.com. Still, Intel stock closed at $22.68 on Friday, for a year-to-date loss of 55%, while the SOXX sports a 20% gain, and the S&P 500 is up 22%.
Intel stock's underperformance has devastated the equity component of Gelsinger's compensation. He had received performance stock units (PSUs) pegged to total shareholder return (TSR) as part of his new-hire package that had an intended grant value of $20 million, but they were forfeited on March 15, 2024, "due to below-threshold performance on the relative TSR metric."
His other new-hire awards, with parameters that were adjusted in 2022, are also in danger of being wiped out progressively.
If Intel stock doesn't trade at $148.95 for 90 calendar days by Feb. 15, 2026 -- about 16 months from now, the fifth anniversary of Gelsinger's hiring -- outperformance PSUs with an accounting value of $45.7 million at the grant date will be canceled.
If shares don't trade at $74.47 for those same time parameters, performance stock options valued at $29.1 million are gone. If shares don't reach $64.54, $34.2 million of strategic growth PSUs will wither and die.
Hitting $64.54, $74.47, and $148.95 would require Intel stock to rocket 185%, 228%, and 557%, respectively, from Friday's close.
Even if Intel stock went on a run like shares of Nvidia, the top target looks unreachable. Nvidia stock, which closed at $141.54 on Friday, took about 20 months to surge 557% from the close on Feb. 10, 2023. That's adjusted for Nvidia's dividends and the 10-for-1 split that went into effect earlier this year. It took about a year for Nvidia stock to soar 228% from the close on Nov. 2, 2023; for Intel to pull off that gain for the sake of preserving some of Gelsinger's equity awards, it would also need the 90-day buffer, so the same trajectory would be a squeaker. The 185% rise looks most feasible -- if such a thing can be said for triple-digit-percentage gains in Intel stock -- since it took Nvidia stock less than 10 months from Jan. 5 of this year to hit that.
The only fully matured and vested equity awards Gelsinger has received during his tenure as CEO have withered in value. His restricted stock units (RSUs), which weren't tied to performance metrics, yielded Intel shares that were valued at a total of $25.5 million on Feb. 15 when the stock was at $44.05. Their value has been about halved since.
To receive a matching grant of RSUs included in that total, Gelsinger paid $10 million for 156,764 Intel shares with his own funds in the first 30 days of employment. After Friday's close, those shares he bought were only worth $3.6 million.
At times Gelsinger has bought Intel stock on the open market, "demonstrating his commitment and confidence in the company and value creation opportunity for stockholders," according to Intel's latest proxy. The CEO has paid $3.74 million over the years for 111,905 Intel shares, an average price of $33.44 each; those shares are now worth $2.5 million. Every share of Intel that he's bought represents a paper loss, except for 12,500 shares Gelsinger bought on Aug. 5, 2024, for $252,000, an average price of $20.16 each.
Interestingly, Gelsinger hasn't sold a single Intel share since becoming CEO -- even when the stock was doing well -- a rare trait in the chips sector. The last time Gelsinger sold Intel stock as an insider was Aug. 28, 2009, when he sold 120,000 shares for $2.43 million, an average price of $20.25 each. At the time he was a senior vice president.
Intel reports third-quarter earnings Halloween night.
Inside Scoop is a regular Barron's feature covering stock transactions by corporate executives and board members -- so-called insiders -- as well as large shareholders, politicians, and other prominent figures. Due to their insider status, these investors are required to disclose stock trades with the Securities and Exchange Commission or other regulatory groups.
Write to Ed Lin at edward.lin@barrons.com and follow @BarronsEdLin.
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(END) Dow Jones Newswires
November 01, 2024 21:30 ET (01:30 GMT)
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