Once again, it brings us no pleasure to discuss the steady meltdown of Intel’s (INTC) business. But this go around, it was especially egregious, and CEO Pat Gelsinger and the management team gaslit shareholders – and the world – as it maintains its recent actions are somehow all part of the planned bigger picture.
Two years-plus of trashing on Intel
Even prior to starting the Chip Stock Investor channel, Nick called Intel of the 2020s like “the IBM of the 2010s.” In fact, our very first video here at CSI in September 2022 was a call to avoid Intel stock, but a focus on (among others) Nvidia, Broadcom, ASML, AMD, and Qualcomm as the eventual “foundation of the next bull market.”
https://youtu.be/rSmLxPiWfkg https://youtu.be/3r9g4FIS0L0 https://youtu.be/ZbV4VRmzqxo
In January 2023, Nick said the dividend needed to go away. A few months later, the dividend was cut by two-thirds – a pointless use of cash. https://youtu.be/EV8PsixrKUs
Over the summer of 2023, after Intel unveiled more “restructuring” plans, we outlined what we actually would need to see to get us interested in ever owning shares. https://youtu.be/YLT8TuHiQRg
This wasn’t the first time we discussed such a topic, but in early 2024 (when some were cheering on “Intel progress”), we explained the companies in line to benefit the most from Intel’s rebuilding plans. https://youtu.be/1WYtJnXpOC4
And finally this past spring, we called out why any bet on Intel at all, if at all, should be kept very small – and one appropriate way for most investors to do so. https://youtu.be/FYmdQuQp8S8
A summer 2024 of corporate gaslighting
Ok, we call out this timeline because Intel’s woes have been very well documented. It has meant a not-so-great investment, and has culminated in yet another dreadful earnings report for Q2 2024.
Things look only marginally better for Q3, too, as revenue is expected to only increase marginally on a sequential basis, and gross profit margins deteriorate further.
Gelsinger and company discussed a new $10 billion cost-reduction plan, and pitched it as a good thing now that it has “made great progress.” Let’s walk through the reasons this is total bogus.
1. The chip inventory and higher demand environment skipped Intel
As you probably know by now, we’re in the beginning stages of a new up-cycle for semiconductor demand. Nearly all of Intel’s major competitors are reporting healthy inventory and robust customer demand.
The story is different for Intel. It seems excess inventory has cropped up once more. What does that mean? Customers just aren’t buying that much Intel silicon.
2. Technology leadership? Prove it.
A massive part of the Intel recovery plan has been the “5 nodes in 4 years” roadmap, as Intel tries to chase down Taiwan Semiconductor Manufacturing’s (TSM) lead in semi manufacturing process node leadership. It was always an ambitious plan from Intel, one that we’ve called out numerous times as being risky for product quality.
Gelsinger is declaring victory now that Intel 7 (the numbers being a marketing term for manufacturing nodes) is in mass production, Intel 4 has been ramping up for six to nine months now, and Intel 3, 20A, and 18A are being built and tested. As a result, Gelsinger and company say that spending on manufacturing equipment can be comfortably decreased.
The problem, though, is that the very first-of-five-nodes in four years, Intel 7, is having serious problems. The future nodes only get more complex. It’s not a good look for the future chip product roadmap, and certainly won’t help woo over chip design customers to Intel Foundry. Below is but one description of some of the issues of one of those Intel 7 product families, “Raptor Lake.”
3. Thanks for the cash, suckers
Intel has also been touting its “smart capital” progress, which largely has involved collecting billions-of-dollars of government subsidies and outside investors’ money. The reported $5.9 billion-worth of “smart capital” in Q2 2024, which is supposed to be going towards building all of those new fabs in support of future manufacturing needs.
Well, in response to the generosity of governments and outside investors, Intel announced layoffs are coming to up to 15% of its more than 100,000 global workforce.
The good news? The dividend is getting suspended (going away, at least for now) starting in the fourth quarter of 2024!
The bad news? Remember our old video from early 2023? The dividend should have been completely eliminated all along! By the time it’s all said and done, Intel will have wasted over $3 billion of “smart capital” on a dividend payment since early 2023. And it seems thousands of employees will once again take the fall.
What’s so stupid about this was the reduced dividend was little more than a consolation prize over the last year-and-a-half as Intel stock has horribly under-performed chip stock peers and the market overall.
It certainly hasn’t helped the balance sheet either. Intel’s debt keeps going up, and cash and investments pale in comparison to the financial might of semi foundry TSMC, which has a ton of cash in excess of its debt.
What hope is there for Intel now?
At this point, after another post-earnings drop, many investors could flock back into Intel stock and buoy the stock price again. Indeed, perhaps it’s cheap again. We don’t know. But it also could still be a value trap, as it has been for years.
As before, we still remain uninterested in ever considering buying Intel until the following items are all checked off.
In our opinion, Gelsinger and the current C-suite aren’t right for the job still left ahead. And seriously, split the chip design business off from Intel Foundry. This wouldn’t even be trailblazing, as AMD already showed the way when it spun off GlobalFoundries as a separate business following the Great Financial Crisis of 2008-9.
Until then, there are a lot of well-positioned semiconductor businesses that seem like much better places to invest right now. Poor business performance and management gaslighting doesn’t interest us.