By Adam Levine
Pat Gelsinger's reign at Intel began nearly four years ago with a flood of initiatives and hope for the future of the tech titan. It ended with a whimper. Gelsinger stepped down this past Monday with no successor in place. Now the short-term demands of investors may be at odds with the long-term health of the company.
Intel stock initially rallied 6% in the wake of Gelsinger's retirement. But within hours, the shares were losing steam. By Friday's close, they had lost 13.2% over the five trading sessions since Gelsinger's announcement. It's a sign that investors don't believe the switch will change the direction of the company, at least not yet. Until a new management team shows it can balance Intel's short- and long-term priorities, investors should avoid the stock.
"While investors may consider this news a positive, we see continued evidence of Intel unable to overcome roadblocks, self-inflicted or otherwise," Edward Jones analyst Logan Purk wrote to clients on Monday. "While a new CEO could potentially inject renewed optimism, the new leader will likely face a litany of issues to tackle before they can right-size Intel."
Intel's No. 1 problem is that it lost chip manufacturing technological leadership to Taiwan Semiconductor Manufacturing somewhere around 2018. By the time Gelsinger became CEO in 2021, the problem had deepened. Gelsinger's main goals were to re-establish that tech leadership and accept third parties as manufacturing customers.
So far the plan hasn't come to much. In order to keep its chips on the cutting edge, Intel has been forced to turn to TSMC to manufacture some of those very chips, for the first time going to an external vendor. Intel continues to pin its hopes on its own manufacturing lines that are due to launch in mid-2025. These launch dates tend to be more aspirational than fixed.
So what now?
With Monday's announcement, Intel now has two interim CEOs. Whoever is chosen to fill the job on a permanent basis will face the same challenges Gelsinger did.
When Intel named Gelsinger in 2021, Intel bulls cheered his engineering background and hoped he would return to the company to chipmaking primacy. Though the plan didn't work out, Intel still needs that kind of expertise.
The company said that its board of directors had formed a search committee and "will work diligently and expeditiously to find a permanent successor to Gelsinger."
On Thursday, Intel named two new independent directors to its board -- a former CEO of semiconductor equipment manufacturer ASML and the interim CEO of Microchip Technologies, a maker of low-end chips.
The additions could suggest Intel is aiming to find another engineer to replace Gelsinger.
Intel's CEO move was unusual, both for its immediacy and because it backdated Gelsinger's departure to Sunday, a day before the press release. That there was no replacement waiting in the wings underscores the unplanned nature of the move, and has led to speculation that there was a boardroom showdown over the weekend.
Intel declined to comment to Barron's about the CEO move and the Board additions.
Investors want cost reductions, which Gelsinger had already begun, including laying off 15% of Intel's employees and canceling the dividend. But those immediate demands of investors are at odds with the long-term health of Intel: the cost reductions include important investments in research and development and capital expenditures.
How do you cut expenses while still meeting the most important goal of catching up to TSMC's technology? The U.S. government's recent grant of $8 billion to Intel from the Chips Act is helpful, but it amounts to less than two quarters of the company's capital expenditures.
The new CEO may be faced with a choice that Gelsinger was reluctant to make: selling off pieces of the company. Spinoff possibilities include Intel's 88% stake in Mobileye's self-driving chip business, worth about $13 billion, Altera and its embedded chips, or the manufacturing arm, which lost $11 billion on $13 billion in revenue in 2024. Intel has to maintain a controlling interest in its manufacturing as a requirement of accepting the Chips Act money.
Another choice may be finding a buyer for the entire company; the stock trades at just 1.5 times tangible book value. In absolute terms, though, Intel still isn't cheap, with a market value of $109 billion. A purchase would require a buyer with very deep pockets, or one that plans to sell off assets after the purchase. A deal would be tricky to pull off, with a lot of delicate political angles.
Ultimately, any new CEO will be faced with bad choices. Short-term thinking is what put Intel in this position, and it won't extricate it, either.
In Intel's favor is its unique position in the U.S. as the only manufacturer with the capability to perhaps catch up to TSMC. That fact is why the company has been the largest recipient of Chips Act grants, 24% of all grants so far. There is a lot of political will behind Intel from both parties. But willpower alone won't solve Intel's problems.
Write to Adam Levine at adam.levine@barrons.com
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(END) Dow Jones Newswires
December 06, 2024 21:30 ET (02:30 GMT)
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