Despite a general boom in technology stocks this year, a major notable exception was Intel (NASDAQ: INTC). Long known as the dominant player in the computer processor space, “Chipzilla” has seen its gap against rivals further deteriorate this year due to internal technology problems, and stocks responded by falling 14.7% in 2020, including dividends . This is a much lower performance compared to the semiconductor sector, which gained 55.5% last year.
1-year INTC (daily) total return data by YCharts
Intel’s underperformance and basic business valuation of just 9.75 times earnings recently attracted activist investor Dan Loeb to invest about $ 1 billion in Chipzilla, after which Loeb sent a scathing letter to Intel’s president, requiring major changes.
Still, although Intel’s stock has jumped on the news, I still advise staying away from Intel at the moment for the following reasons.
An activist will not solve Intel’s problems. Image source: Getty Images.
What Loeb said
Reading Loeb’s letter to the president of Intel, there doesn’t seem to be any new news. Basically, Loeb only punished Intel for losing its manufacturing advantage over the past seven years, without offering real solutions, except to “hire a reputable investment advisor to evaluate strategic alternatives, including whether Intel should remain a manufacturer of integrated devices and the potential divestment of certain failed acquisitions. ”
Yes, Loeb’s point that top management paid very well while the company was lagging behind in manufacturing is probably right, so some significant cost savings could be achieved. However, the mere fact that Loeb points out the obvious will not help Intel’s actions. In addition, Intel is already contemplating outsourcing part of its manufacturing to external factories. In the meantime, divesting its own manufacturing entirely could save the company in the short term, at which point Loeb could simply sell its shares, while harming Intel’s competitiveness in the long run.
Stuck between a rock and a hard place
Not long ago, Intel was the envy of the chip world and regularly ahead of its rivals in the production of high-end processors. However, the industry increasingly adopted a “fabless” model, in which companies only designed chips and outsourced complex and expensive manufacturing tasks to other foundries. This allowed Semiconductor manufacturing in Taiwan (NYSE: TSM), the largest third-party smelter by volume, to gain manufacturing experience and jump ahead of Intel, reaching 7 nm production before Intel could reach its 10 nm chips – which are, for some reason, equivalent to 7 nm of the TSM.
Taiwan Semi is already producing 5 nm chips, while this summer, Intel revealed yet another delay in its equivalent 7 nm chips until 2022 or 2023. This would leave Intel several years ago, and in a really precarious position.
In other words, part of what made Intel great is now its biggest liability. Therefore, the company is between a rock and a difficult position. If you sell your factories and run out of a factory, you could reach your rivals in terms of chip density; however, Intel would sacrifice the very differentiated advantage that gave it an initial advantage.
“Divesting” seems like a short-term solution to an old problem
Loeb’s other claim is that Intel should consider the “potential divestment of certain failed acquisitions”. Loeb is probably eyeing the Altera unit, which makes field programmable door arrays, or custom chips, or Mobileye, the autonomous driving software unit.
And yet, if Intel was so wrong when it bought Altera in late 2015, why would the rival CPU Advanced micro devices (NASDAQ: AMD) just buy rival Altera and fellow FPGA maker Xilinx? Clearly, there seems to be some advantage to being able to offer CPUs and FPGAs under one roof, and to coordinate system designs on the chip with both types of processors.
Meanwhile, Intel is already disposing of non-strategic assets, recently selling its NAND flash business to SK Hynix and also divesting its $ 314 million stake in the big data platform Cloudera just in the last few months.
So it looks like Intel is already part of what Loeb is suggesting. That said, divesting everything except CPUs looks like an ax when a scalpel is probably the best.
What Intel Needs
Here’s what Intel should do: fix what went wrong and go back to producing the best high-end chips in the world. This will likely require some new leadership, or at least a new culture that attracts the best tech talent to want to work for Intel instead of rivals. I agree with former Cypress Semiconductor founder TJ Rodgers, who recently called for this change at Intel on CNBC.
In the meantime, Intel may need to use some third-party factories to reach its rivals, but a wholesale reduction in its strategic assets will not make it exactly more competitive in today’s super competitive technology sector.
Of course, this correction will not be easy and will not happen overnight. It certainly won’t happen if the company starts selling parts of itself. Meanwhile, Intel looks like it will continue to lose market share in the cloud notebook and processor market next year – more as it works to fix the problem. During that time, your stock price is likely to remain depressed.
That’s why I would still stay away from this seemingly cheap stock until a new leadership arrives, or a new direction is more clearly outlined.