Intel INTC While it has become one of the most respected businesses in the world, it is facing some upcoming storms that won’t be easy to navigate.
America’s largest semiconductor designer and manufacturer has for years made the “Intel Inside” chips that go into personal computers. It expanded into providing high-performance chips that power corporate datacenters, while also pursuing new applications such as neuromorphic computing, quantum computing, and field programmable gate arrays. Intel is a truly global organization; It has 120,000 employees, hundreds of thousands of active patents, and a very high level of commitment to innovation.
Yet the company — whose founder Gordon Moore coined “Moore’s Law” to suggest that transistor density doubles every two years — may have become a victim of its own success.
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With a commitment to innovation, Intel has fallen behind many of its competitors in chip design in recent years. ARM Holdings, which is currently owned by SoftBank but has hinted at going public in the near future, has more than 90% of the market share when it comes to architectural designs for energy-efficient smartphone chips. And in corporate datacenters, computationally-heavy artificial intelligence workloads have driven customers to high-performance processors offered by NVIDIA. NVDA and AMD AMD. NVIDIA’s A100 GPUs are “AI accelerators” capable of computing AI code more efficiently in parallel rather than in series. AMD’s Epyc CPUs feature a fundamentally redesigned architecture that greatly improves their computing performance.
This flood of innovation has made it challenging for Intel to keep up with the design, as cloud computing customers like Amazon AMZNMicrosoft MSFTand the alphabet GOOGLE Voted with their wallet. NVIDIA’s data center revenue is currently growing at 61% ($3.8 billion in its most recent quarter) and AMD’s at 45% ($1.6 billion in its own). Meanwhile, Intel’s data center sales fell 27% ($4.2 billion). On the design front, the mark is clearly giving the competitors a share.
Opening the expansion spigot
To counter its design losses, Intel hopes to contract its fabs to produce chips for others. Its new Intel Foundry service takes design plans from customers and manufactures them to specification at the lowest possible cost. IFS is achieving an annual run rate of nearly $700 million and has recently won contracts from MediaTek and Qualcomm. Building a fab is very expensive, so Intel wants to offer some of its production capacity to make chips for others.
This is very different from the direction the semiconductor industry has moved over the past two decades, as most companies have tried to lighten their balance sheets by avoiding internal production. AMD created its Global Foundries GFS The manufacturing division returned in 2009 so that it could have an asset-light model focused solely on design. NVIDIA and ARM have always focused only on design and never had their own product.
And downstream of the design process, Taiwan Semiconductor, the world’s largest chip maker TSM has always remained independent and focused on optimizing its own process technology to produce state-of-the-art chips in large quantities for others. Taiwan Semi does not manufacture or sell any of its own internally-designed chips.
Geopolitical storms are brewing
Yet Intel believes the world is becoming a dangerous place and geopolitical storms are brewing. And it’s probably right about that.
No wonder China has ambitions to annex Taiwan. No one knows (at least without security clearances) what military force would mean in that scenario for China, Taiwan, the Western world, or Taiwan Semi’s existing manufacturing contracts. Intel CEO Pat Gelsinger has been campaigning tirelessly in the US, Germany and elsewhere that Intel’s American-based manufacturing facilities will provide security of supply even in times of rising geopolitical tensions. In the same conversations, Gelsinger has called for federal grants and funding — such as from the Biden administration’s CHIPS Act — to help the U.S. and its allies secure their supply of the most advanced chips and support national interests.
Intel recently broke ground on its Ohio-based “mega fab,” which will cost $20 billion in its first phase and potentially up to $100 billion. The CHIPS Act committed $3 billion in federal funding for the first phase and potentially up to $6 billion. The project will also include funding for job creation and regional education.
Other large corporate clients may follow suit. Apple can AAPLQualcomm QCOM, and are other innovative tech companies equally interested in domestic supply? Apple is Taiwan Semi’s largest individual customer and alone accounted for more than $15 billion of TSMC’s total revenue last year (26% of its top line).
show me the money
But between Intel’s declining market share in corporate datacenters, a slowing PC demand and its aggressive fab expansion plans, Intel finds itself strapped for cash.
The company currently has $22 billion in cash and short-term investments on its balance sheet. That may sound like a lot, but it’s down significantly from $40 billion at the start of 2022.
Mobile’s recent IPO is a new source of capital MBLY. Intel bought Mobileye back in 2017 for $15.3 billion, though it returned to the public market this past month at a $17 billion valuation.
Mobileye’s valuation has risen only modestly; That was an 11% increase from $15 billion to $17 billion over that five-year period. Still, the public offering provided Intel with $861 million in new capital to work with.
Tough decisions have to be made
Intel has also committed to trimming some of the fat internally. It announced total cost cuts of up to $10 billion over the next three years in response to slowing PC demand and declining sales in many of its divisions.
And then, there is the curious question of what to do with the dividends.
Although thousands of Intel employees will lose their jobs by 2025, Intel is fully committed to paying its $6 billion annual cash dividend.
The company will undoubtedly want to keep the dividend intact to continue to appeal to its institutional investors. Vanguard, BlackRock holds millions of shares of Intel BLK, and many other institutional funds. Vanguard and BlackRock together own about 16% of Intel’s outstanding shares, and dividends from those shares are providing much-needed retirement income for 401K and IRA plans.
Yet one can’t help but wonder if now is the right time to rip off the Band-Aid? For its aggressive expansion plans or for the sake of its own employees, perhaps Intel should consider reducing or reducing its $6 billion annual dividend.
7 Investment Key Takeaways
Intel is one of the most fascinating companies on the planet. It helped create the world’s fastest-growing semiconductor industry, which has enabled big trends like smartphones, cloud computing and artificial intelligence. Both competition and global tensions are rising, and Intel will need billions of dollars to steer its juggernaut chip ship into uncharted waters.
Those waters will be very turbulent and will not be easy to navigate. The decisions Gelsinger and his leadership team make over the coming year will have significant implications for Intel’s long-term investors.