Running chipmaker Intel may have been a “dream job” for CEO Pat Gelsinger when he began his tenure, says Asa Fitch in The Wall Street Journal. But three years on, things look “increasingly nightmarish”. Intel’s stock slumped by 26% to a 15-year low on 2 August, knocking more than $30 billion off the group’s market value.
The collapse came after disappointing results and an outlook notable for unexpectedly low revenue and profit-margin forecasts. Intel also said it would lay off 15,000 employees, target $10 billion in cost cuts next year and suspend dividend payments in the fourth quarter, the first time in more than three decades the company has not made a payout.
The latest earnings are a reminder of just how “woefully” Intel “lags behind the likes of Nvidia and TSMC”, says The Economist. For decades, Intel “dominated global chipmaking”, cornering the market for personal computers (PCs) thanks to the “Wintel” alliance with software giant Microsoft.
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However, a series of “missteps” caused it to fall behind. Thanks to its focus on PCs, it missed the boom in demand for mobile phone chips. As a result, the company “is miles behind when it comes to designing [artificial intelligence] chips”, and will need to make “big investments” to catch up with the likes of TSMC.
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Gelsinger has sought to overhaul Intel’s business model “with a push to become a major foundry player”, says Lex in the Financial Times. It has committed to “tens of billions of dollars to build new factories to make chips for other companies”. However, while these factories are “years away”, the spending spree has “pushed up Intel’s costs and hurt profitability”.
Meanwhile, PC sales are falling, and demand for data centres is falling amid “a shift in spending that prioritises [AI] chips dominated by Nvidia”. What’s more, things are set to get “tougher still” after the US government revoked Intel’s licence to supply chips to China’s Huawei Technologies in May.
Intel’s room for manoeuvre is further constrained by its debt, says AJ Bell’s Russ Mould. The net cash pile peaked at $16 billion in 2004; it has been whittled away and replaced by net borrowings, thanks partly to the billions Gelsinger’s predecessors spent on share buybacks to “goose earnings-per share figures”. If Intel “still had those $63 billion its ability to keep on investing to defend its competitive position would surely be enhanced”.
Given Intel’s financial and operational woes, suspending the dividend is the right idea, especially since AMD, one of Intel’s rivals, doesn’t pay a dividend, says Robert Cyran for Breakingviews. However, slashing investment and firing a large number of employees, while intended to reduce the “short-term pain”, will only “make regaining the technological lead from arch-rival [TSMC] even harder”.
Despite support from the US government, it’s “increasingly hard” to see how Intel will solve its underlying problem: the “force of inexorably falling revenue and margins” looks “inescapable”.
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