We are closer to the banking/finance sector and rarely write about individual companies unless they are of major importance in some way, such as being the focus of systemic risk or indicative of a larger trend.
We’re sparking a debate from our comments yesterday about the argument that Intel is exhibiting many of the same ailments as Boeing and has an equally daunting task of resolving its production problems and regaining competitiveness. To make matters worse, Intel lacks the advantage of a cozy duopoly in its core business.
A quick summary of Intel’s turmoil: its stock price has plummeted to its lowest level in 50 years.
Intel is cooked
– Over 15,000 people will be laid off
– $INTC Down 29% today
– Suspension of dividends
– Foundry business loses billions of dollars
– Broken Raptor Lake chips are beyond repair
– ARM dominates the laptop market
– ARM dominates the data center market
– Completely missed the AI trend pic.twitter.com/QmqtaiwpM2— Fireship (@fireship_dev) August 2, 2024
For a more detailed overview Vox:
Intel’s worst week is actually its worst quarter. It began way back in April, when the company revealed in an investor presentation that a series of poor decisions in its chip manufacturing division had caused it to lose $7 billion in 2023, on top of a 31 percent drop in revenue from 2022. CEO Pat Gelsinger said cost-cutting and other measures would save the company $10 billion in 2025…
This isn’t the first time the company has had to implement cost-cutting measures: Intel carried out mass layoffs in October 2022 after the company’s performance temporarily improved due to the impact of COVID-19.
“In February 2022, they issued revenue targets — and I use the word ‘outrageous’ — that were sky-high,” Stacey Rasgon, a senior analyst at Bernstein Research, told Vox. “They were sizing their company and their investments to match COVID-19 revenue levels, based on the need for technology to enable work from home and remote learning for kids.” But the business collapsed almost as quickly as it rose.
But current CEO Pat Gelsinger took over a business that was emerging from a decade of struggle when he took over in 2021. “When Gelsinger took over, they were in a really tough spot and didn’t have a competitive product to bring to market,” with Jensen Huang’s Nvidia dominating AI tech trends, Futurum Group CEO Daniel Newman told Vox.
Intel’s other big recent bet is its foundry business. It has three facilities in the U.S. and overseas to make semiconductor chips, and others in Asia and Latin America for testing and assembly. But it’s off to a rocky start: Intel declined to invest in cost-effective extreme ultraviolet machines at its manufacturing facilities, for example, and has since had to outsource 30% of its manufacturing to rival TSMC.
In comments yesterday, readers painted Inter’s plight in darker colours.
Reader Keith I started by linking to a sobering observation from Timothy Prickett Morgan. Representative snippets:
…when Pat Gelsinger, the would-be savior and savior of the company he first loved and loved the most, tells Wall Street that this is Intel’s most significant comeback since it first exited the memory business – and we’re talking about DRAM in 1985, not 3D XPoint or flash here – He’s not joking.In the end, this may be considered a miracle.
In fact, Gelsinger is asking for God’s help.
Hello, I am new to the stock market. Would it be a good idea for the CEO of Intel to start praying? https://t.co/E4Tb5nzgTr
— DatNoFact ↗ (@datnofact.bsky.social) (@datnofact) August 4, 2024
More about Murphy:
Sometimes, such tough measures work. After its own near-death experience in the mid-1990s, IBM took tens of billions of dollars in write-downs, something unheard of, unimaginable, and unthinkable for a stock that was originally a blue chip. The company laid off 200,000 of its 400,000 employees as it pivoted to software and services and reduced its independent systems fiefdom to bring costs in line with revenue. IBM eventually got its headcount back to 400,000, but along the way, it subsequently sold off many of its systems and services businesses and focused on becoming a hybrid platform provider, with Red Hat at the center of that strategy. This was IBM’s fifth rebirth of the punch card machine that Herman Hollerith built in 1890 to take the 1890 census, and this is the true heart of the company known as Big Blue.
…This resurgence of Intel is like a company reminding itself of what it learned in the mid-1980s: design good chips, make good chips, and be vigilant enough to survive. …
Intel has a tougher road ahead, but the company is actually getting its foundry in order. It’s putting together chip designs and reducing its reliance on Taiwan Semiconductor Manufacturing for its most advanced CPU chiplets, bringing them to its own fabs for 18A, 14A, and 10A processes. It remains to be seen whether other companies will use its foundry for the 14A and 10A processes, but Intel is apparently integrating third-party tools from Cadence, Synopsys, Siemens, and Ansys to enable them, and we think it will get some business from chipmakers looking for alternative etching and packaging. We think the company will have a profitable foundry business and will make great chips that people want to buy. But we think the X86 market will decline as Arm rises in hyperscale and cloud builders. Intel not only knows this, it accepted it years ago, and that’s why it has to have an open foundry business. If you can’t beat an Arm CPU, make an Arm CPU.
leader pearl rangefinder I thought this view was overall too optimistic.:
I think he really underestimates how badly Intel is in. Intel’s entire business model is totally messed up, because when they were on top, they basically spent 10 years doing nothing. Spending $100 billion on share buybacks Their competitors caught up and left them behind. Now they have essentially no competitive products left in the core part of their business: their GPUs are far behind Nvidia and AMD, their x86 processors are uncompetitive (and It has serious defects and so far they have refused to even recall or suspend sales. ), its data center business is dying, and its chip manufacturing division can’t compete with Taiwanese chipmaker TSMC, which was once a decade ahead of Intel technologically.
The worst is yet to come. Intel’s factories are so far behind that they are being forced to gradually switch production of their latest processors to TSMC. The company is already using TSMC factories for the GPU portion of its “Meteor Lake” generation of processors, and rumors and news sources suggest that Intel’s next processor families (“Arrow Lake” and “Lunar Lake”) will be fully outsourced to TSMC. Intel’s entire business model was predicated on leveraging its unmatched in-house manufacturing expertise and unmatched processor design expertise to have enough scale and sales power to supply chip foundries. Scale matters in the factory business, and every dollar you send to TSMC is a dollar that doesn’t go to your own foundries. It’s a vicious cycle.
Intel is now like the Boeing of technology, and frankly, probably worse than that. To save itself, Intel would need a number of miracles in different parts of its business, and nothing in the past decade has suggested that Intel’s management was remotely up to the task.
$100 billion in buybacks over the last decade. The total since 1990 is $152 billion.
What you’re describing sounds like a self-Boeingization that Intel’s leadership has voluntarily chosen.
Would it be wrong to understand it that way?
Not at all. I think the parallels between the two are very apt. The biggest similarity is that both companies burned a ton of cash on ridiculous share buybacks and their management seems more focused on financial engineering than on actual business. In Intel’s case, it seems even more ridiculous when you consider how capital intensive advanced chip manufacturing factories are these days (at least $10B+; TSMC’s 2nm factories are said to cost over $30B to build!). On the chip design side, it takes years to get a processor from blueprint to production, so they need a ton of capital to stay in business while they design the next generation of products. This also means that if the design isn’t very good, they could be bleeding red ink for years while they wait for the successor. This is exactly what happened when AMD introduced their “Bulldozer” microarchitecture in 2011. They couldn’t perform as well as Intel’s products at the time and the company nearly went bankrupt. AMD began designing the successor “Zen” architecture in 2012, and by 2016 it took four years to release Ryzen/Zen-1.
I’m not saying that buybacks are the cause of all of Intel’s (or Boeing’s) problems, because they absolutely aren’t, but, damn it, there’s a good reason why buybacks used to be illegal. Only a sick society would allow financial parasites to play these stock manipulation games at the expense and survival of corporations.
Inter was also a cash cow. In a good year, net profit margins could reach more than 30%.revenues approaching $70 billion, which is just crazy for a hardware manufacturer. What would happen if you screwed that up?
Before buybacks became popular, a wise friend of mine argued, “Why invest in a company whose management isn’t going to invest in it?” But buybacks facilitate the slow liquidation that I first described in a 2005 Conference Board Review article called “The Incredibly Shrinking Company.” By that time, it had become clear that U.S. corporations, as a whole, were net savers, which was both an anomaly and a bad omen.
Companies typically invest in times like these when profits are high and interest rates are low, but a recent JPMorgan report found that since 2002, U.S. companies have had an average net financial surplus of 1.7%.
The deficit is 1.2 percent of GDP, in contrast to an average deficit of 1.2 percent of GDP over the past 40 years. While businesses overall have had surpluses at times, “…recent levels of corporate saving are unprecedented…It is important to emphasize that the current situation is in some sense unnatural. A more normal situation would be for the global corporate sector to borrow and for households in the G6 countries to save more, in advance of a demographic downturn, both in the G6 and emerging economies.”
The article detailed how short-termism, especially the obsession with quarterly profits, became so ingrained that it led to all kinds of dysfunctional behavior. Importantly, management took the view that shrinking current operations as hard as possible was less risky and would pay off much sooner. Investing in growth became even more discouraged, not only because it took longer to see results and was more dangerous, but also because almost every “investment” had a short-term impact on the P&L (marketing plans, expanding office or factory space, etc.). Shrinkage or slow growth in existing lines of business was often masked by acquisitions.
Still, a change in degree is a change in nature. The levels of corporate negligence at Boeing and Intel need to be named. Any suggestions?
