Despite a general boom in technology stocks this year, one big notable exception has been Intel (NASDAQ:INTC). Long known as the dominant player in the computer processor space, “Chipzilla” saw it moat against rivals deteriorate further this year due to internal technology problems, and the stock has responded by falling 14.7% in 2020, including dividends. That’s a huge underperformance against the semiconductor sector, which gained a whopping 55.5% last year.
Intel’s underperformance and bargain-basement valuation of just 9.75 times earnings has recently attracted activist investor Dan Loeb to invest roughly a $1 billon stake in Chipzilla, after which Loeb sent a scathing letter to Intel’s Chairman, demanding big changes.
Yet while Intel’s stock jumped on the news, I’d still advise staying away from Intel at the moment for the following reasons.
What Loeb said
Reading Loeb’s letter to Intel’s chairman, there doesn’t appear to be any new news there. Basically, Loeb just castigated Intel for losing its manufacturing edge over the past seven years, while offering no real solutions except to “retain a reputable investment advisor to evaluate strategic alternatives, including whether Intel should remain an integrated device manufacturer and the potential divestment of certain failed acquisitions.”
Yes, Loeb’s point that top management was wildly overpaid while the company was falling behind on manufacturing is probably right, so some meaningful cost-savings could be accomplished. However, Loeb’s mere pointing out the obvious won’t help Intel’s stock. Furthermore, Intel is already contemplating outsourcing some of its manufacturing to outside fabs. Meanwhile, completely divesting its own manufacturing may save the company in the short run, at which point Loeb could merely sell his stock, while damaging Intel’s competitiveness longer-term.
Stuck between a rock and a hard place
Not too long ago, Intel was the envy of the chip world, and regularly out front of rivals in producing leading-edge processors. However, more and more of the industry went to a “fabless” model, in which companies would only design chips and outsource the complex and costly tasks of manufacturing to other foundries. That allowed Taiwan Semiconductor Manufacturing (NYSE:TSM), the largest outsourced foundry by volume, to gain manufacturing expertise and leap ahead of Intel, reaching 7nm production before Intel could reach its 10nm chips — which are, for some reason, equivalent to TSM’s 7nm.
Taiwan Semi is already producing 5nm chips, while this summer, Intel disclosed yet another delay to its equivalent 7nm chips until 2022 or 2023. That would put Intel several years behind, and in a precarious position indeed.
In other words, part of what made Intel great is now its biggest liability. Therefore, the company is in between a rock and hard place. If it divests its fabs and goes fabless, it could then catch up to its rivals in terms of chip density; however, Intel would then sacrifice the very differentiated advantage that gave it an edge to begin with.
“Divesting” seems like a short-term solution to a longtime problem
Loeb’s other contention is that Intel should consider “potential divestment of certain failed acquisitions.” Loeb probably has his eye on the Altera unit, which makes field programmable gate arrays, or customized chips, or Mobileye, the autonomous driving software unit.
And yet, if Intel was so wrong in purchasing Altera in late 2015, why did CPU rival Advanced Micro Devices (NASDAQ:AMD) just purchase Altera rival and fellow FPGA-maker Xilinx? Clearly, there seems to be some advantage in being able to offer both CPUs and FPGAs under one roof, and coordinate systems-on-chip designs with both types of processors.
Meanwhile, Intel has actually already been divesting non-strategic assets, recently selling its NAND flash business to SK Hynix and also divesting its $314 million stake in big data platform Cloudera in just the past few months.
So, it appears that Intel is already doing some of what Loeb is suggesting. That being said, divesting everything except CPUs seems like a hatchet when a scalpel is probably best.
What Intel needs
Here’s what Intel should do: fix what it screwed up, and get back to producing the best leading-edge chips in the world. Likely, that will take some new leadership, or at least a new culture that attracts the best tech talent to want to go work for Intel over rivals. I agree with former Cypress Semiconductor founder T.J. Rodgers, who called for such a change at Intel recently on CNBC.
Intel may need to use some outsourced fabs in the meantime to catch up to its rivals, but a wholesale shedding of its strategic assets won’t exactly make it more competitive in today’s super-competitive technology industry.
Of course, this fix won’t be easy, and it won’t happen overnight. It certainly won’t happen if the company starts selling off parts of itself. Meanwhile, Intel seems as if it’s going to continue losing market share in notebook and cloud processors over the next year-plus as it works to right the ship. During that time, its share price will likely remain depressed.
That’s why I’d still stay away from this seemingly cheap stock until new leadership comes in, or a new direction is more clearly outlined.