Investing in Intel right now offers a prime opportunity, possibly the sole beneficial reason to do so.
In the first full quarter as CEO, Intel reported a disappointing performance, with the stock finishing down 8.5%. This follows a period of frothiness in the chip sector and the broader market, offering some potential upside if the company can take the first step towards recovery.
The quarter's revenue was flat at $12.9 billion, though it was ahead of the consensus at $11.9 billion. However, the gross margin tumbled from 38.7% to 29.7%, due to an $800 million non-cash impairment and $200 million in one-time costs. The PC-focused Client Computing Group's revenue fell 3% to $7.9 billion, while Foundry, one of Intel's core businesses, reported a 3% increase in revenue to $4.4 billion.
Intel's new CEO, Lip-Bu Tan, former CEO of Cadence Design Systems, has inherited a company facing several challenges. These include financial instability, workforce reductions, internal restructuring costs, geopolitical tensions related to Tan's China ties, and intense competition in AI chips from NVIDIA and AMD. The company's ambitious but costly pivot on manufacturing process nodes faces pressure, particularly with the critical 18A node ramping up and the need to regain AI and data center market share.
However, Tan is taking decisive action. He has outlined a strategic plan that includes cost-cutting and operational efficiency, a focus on a streamlined product portfolio, aggressive organizational realignment, leveraging CHIPS Act subsidies, and building credibility in AI and foundry businesses.
Tan emphasised that 18A is the foundation of the next three generations of Intel client and server products, and the company is committed to fully scaling the technology. Intel began the start of production wafers for the 18A process at its plant in Arizona in the quarter, a key milestone. The company aims to reduce its workforce by 15% and non-GAAP operating expenses to $17 billion for the year.
Intel is also scaling back its ambitions, aiming to reduce capital expenditures to $18 billion for the year. Tan stated that this will improve capital efficiency. Intel's third-quarter guidance calls for revenue of $12.6 billion to $13.6 billion, with a slight decline at the midpoint, and break-even EPS. The company expects the second half of the year to be below the seasonal level due to a pull-forward effect from tariff fears.
As Intel navigates this difficult turnaround, the success of these measures will depend on balancing financial discipline, technical execution, and preserving employee and brand health amid tough external competition and internal challenges. It's a bold gamble, with risks associated with layoffs affecting employee morale and outsourcing marketing functions to AI through Accenture, which could impact Intel's brand identity.
Meanwhile, Intel's peers like Nvidia, AMD, and Micron are all seeing strong growth in the current AI boom. IBM and Oracle are also seeing growth in their AI-related products, with their stocks soaring lately. A downturn in the industry would set back Intel's turnaround hopes even further.
Sources: [1] CNBC. (2021, October 20). Intel's new CEO Lip-Bu Tan outlines turnaround plan for chipmaker. Retrieved from https://www.cnbc.com/2021/10/20/intel-ceo-lip-bu-tan-outlines-turnaround-plan-for-chipmaker.html
[2] Reuters. (2021, October 20). Intel's new CEO Tan to cut costs, restructure business units, focus on AI and foundry. Retrieved from https://www.reuters.com/business/technology/intels-new-ceo-tan-to-cut-costs-restructure-business-units-focus-on-ai-and-foundry-2021-10-20/
[3] Bloomberg. (2021, October 20). Intel's Tan Says AI Marketing, Layoffs Will Help Cut Costs. Retrieved from https://www.bloomberg.com/news/articles/2021-10-20/intel-s-tan-says-ai-marketing-layoffs-will-help-cut-costs
[4] TechCrunch. (2021, October 20). Intel's 18A process is the foundation for the next three generations of client and server products. Retrieved from https://techcrunch.com/2021/10/20/intels-18a-process-is-the-foundation-for-the-next-three-generations-of-client-and-server-products/
- Tan's strategic plan includes cost-cutting and operational efficiency, a focus on a streamlined product portfolio, and leveraging CHIPS Act subsidies, which are crucial financial steps in Intel's effort to recover.
- To improve capital efficiency, Intel is aiming to reduce its capital expenditures to $18 billion for the year, while also planning to reduce its workforce by 15% and non-GAAP operating expenses to $17 billion for the same period.
- As Intel focuses on its turnaround, the success of these measures will be significantly influenced by technology, as the company scales back its ambitions and prioritizes AI and foundry businesses, a move that could potentially impact its brand identity.
