Is Intel Dead Inside?
15,000 Job Cuts Might Do The Trick!
Once a juggernaut in the semiconductor industry, Intel Corporation (NASDAQ: INTC) has been facing a turbulent decline in recent years. What happened? Is there some value to squeeze from this once-upon-a-time behemoth? This article will explain it and provide a fair value for today’s stock.
The Catalyst: Apple’s Breakup with Intel
Intel’s downfall can be traced back to late 2020 when Apple announced it would drop Intel’s chips in favour of its custom silicon for MacBooks. This marked the beginning of a challenging era for Intel, which has since struggled to regain its former glory.
Apple’s decision to move from Intel chips to ARM-based M1 processors was a significant blow. The new chips delivered superior performance and energy efficiency, setting a new benchmark for the industry. This shift highlighted Intel’s lag in innovation and inability to keep pace with the evolving demands of the market.
Apple’s departure resulted in losing a key customer and a public statement about Intel’s dwindling competitiveness. The tech giant’s successful transition showcased that technology companies could design better chips tailored to their specific needs, spurring others to follow suit.
TSMC and NVIDIA Dominating the Market
Taiwan Semiconductor Manufacturing Company (TSMC) has emerged as the undisputed leader in the foundry business with over 60% market share. With its advanced process technologies, TSMC has become the go-to manufacturer for numerous companies, including Apple and NVIDIA. Its dominance has left Intel struggling to keep up with its manufacturing capabilities.
NVIDIA, on the other hand, has carved out a niche with its superior GPU designs. As AI and machine learning applications surged, NVIDIA’s GPUs became the backbone of these computationally intensive tasks. Intel’s attempts to break into the GPU market have been unsuccessful, further cementing NVIDIA’s dominance.
AMD’s Ascent in the Data Center
AMD has been another thorn on Intel’s side, particularly in the data centre business. With its EPYC processors, AMD has managed to steal significant market share from Intel. These processors offer better performance-per-dollar, energy efficiency, and innovative features, making them an attractive option for data centres worldwide.
AMD’s resurgence has been nothing short of remarkable. It has challenged Intel’s long-held supremacy in the server market. The competition has intensified, and Intel’s inability to respond effectively has cost it dearly.
Customers Designing Their Chips
In addition to losing Apple, Intel now faces the challenge of other significant customers like Microsoft, Amazon, and Google designing their chips. These tech giants have embarked on creating custom silicon optimized for their specific workloads, reducing their reliance on Intel.
This trend indicates a broader industry shift where companies believe they can achieve better performance and cost-efficiency through bespoke chip designs. Intel’s once stronghold on the market erodes as these custom chips gain traction.
Can Intel Recover Under Pat Gelsinger?
Pat Gelsinger, who rejoined Intel as CEO in 2021, has been tasked with steering the company back to its former glory. Gelsinger’s strategy focuses on revitalizing Intel’s manufacturing capabilities and investing heavily in research and development. In his first 100 days, Gelsinger promised investors that Intel’s revenue would have an annual Compound Annual Growth Rate (CAGR) of 10–12%. It is an understatement to say he has fallen short of expectations.
In a broad cost-cutting initiative, Intel has announced plans to cut around 15,000 jobs. The decision comes amid ongoing struggles to compete with rivals like AMD and NVIDIA and efforts to regain its footing in the semiconductor industry. The layoffs reflect Intel’s strategic pivot to streamline operations and reinvest in its core business areas to drive future growth.
The road to recovery has many challenges. While Gelsinger’s initiatives have shown some promise, turning around a giant like Intel is no small effort. The competitive landscape is fiercer than ever, and Intel’s rivals are not standing still.
Financial Performance: A Mixed Bag
Intel recently posted revenues of $12.8B in Q2 2024, down by 22% to $16.5B in Q2 2019. This decline indicates that Intel has been freefalling year-to-year and is far from reclaiming its previous momentum.
The decision to cut dividends from Q4 2024 is a double-edged sword. On one hand, it frees up capital for reinvestment in critical areas. On the other hand, it unsettled many investors who rely on steady dividend payouts, negatively impacting stock performance. At the time of writing, the stock trades at around $19, wiping out over two decades of gains.
Intel’s share performance since June 2000 has been lacklustre, especially compared to the broader semiconductor sector, which has seen significant gains driven by the AI boom. This relative stagnation underscores the market’s scepticism about Intel’s ability to catch up with its more agile and innovative competitors.
Road to a Fair Value
Intel’s fair value assessment has been discussed among investors, especially in light of recent strategic moves and financial performance. Using this Fair Value Calculator from Stock Finance Pro, Intel’s default Fair Value is $12. Believe it or not, that’s roughly a 40% decline from where it trades today. The following influenced this fair value:
- Five Years Annual Growth Rate = 5%
- Margin of Safety = 20%
- Discount Rate = 10%
- Estimated Revenue in 2029 = $63B to $66B
- Estimated Net Income in 2029 = $1.9B to $2B
Analysts consider factors such as revenue stability, cost-cutting measures like the recent job cuts, and ongoing investments in technology and manufacturing capabilities. Despite intense competition and market challenges, Intel’s fair value is influenced by its potential to innovate and reclaim market share. The company’s decision to cut dividends from Q4 2024 also impacts this valuation, reflecting a strategic shift to prioritize reinvestment over immediate shareholder returns.
Conclusion: A Challenging Path Forward
Intel’s journey over the past few years has been turbulent. The loss of critical customers intensified competition, and the rise of custom silicon solutions has painted a challenging picture for the company. Pat Gelsinger’s leadership brings hope, but the path to recovery is unclear for most investors.
The company’s future hinges on its ability to innovate, regain technological leadership, and adapt to the rapidly changing semiconductor landscape. While Intel is far from dead, it faces a monumental task in reclaiming its throne. Only time will tell if Gelsinger can turn things around and restore Intel to its former glory.
