Daniel Newman, principal analyst at Futurum Research, joins Yahoo Finance Live to discuss why activist investors are targeting Intel and what lies ahead for the chip maker.
Video transcription
JULIE HYMAN: Intel shares about 2% today. The stock recently rose after Daniel Loeb’s Third Point took a stake in the company, about $ 1 billion, and is pushing for some changes, including perhaps Intel stop making its own chips. To talk more about all of this, we are accompanied by Daniel Newman, now from Futurum Research. He is a principal analyst there.
Daniel, it’s interesting, and just as a background for people, many chip makers are so-called “factory-free” chip makers. In other words, they design the chips, but they don’t do them all internally. Intel, in contrast, manufactures most of its chips internally. And I think Loeb sees this and many other investors see it as a disadvantage now. It is a disadvantage and would Intel do well to migrate away from this model?
DANIEL NEWMAN: Yes. First of all, thanks for having me. Happy New Year. It was a really eventful end of the year for Intel to have Dan Loeb and his fund publicizing this memo. You know, I think Intel could definitely benefit from doing a better job of reassuring its investors about its strategy of letting them know what the company is doing.
I think it is a little inaccurate to say that they are making their own manufacture. For many years, Intel was part of its manufacturing outside of its own factories. And you know, I think it will be something that the company can continue to use to differentiate itself.
But he is also right. That is, the company has been slow to see the same types of movements in the market as its competitors, namely AMD and NVIDIA. Both are trading well north of 50 times their price – their PE indices, while Intel is around 10. And that has a lot to do with the fact that there is some confidence in the market.
The company faced many challenges, ranging from 14 nanometers to 10 nanometers. This caused some problems in the factories. Some reformulation had to be done in order to meet yields and demands. And all of those things started to increase and confidence started to become an issue within the investor community.
That said, the company as an integrated– an IDM, the company has a strategy. It is moving more and more towards that chip or smaller and less monolithic projects that its own factories should be able to handle. And it could also benefit from leveraging a more hybrid model, as Loeb suggested.
So I think it’s somewhere in the middle. I don’t see the spin-off happening. And I think Intel has already explored that. So, there wasn’t much news for me, but I think having an activist coming and saying that we are going to get involved here, you definitely saw an increase in market confidence because the price went up immediately.
MYLES UDLAND: And Daniel, I think that when you look at Loeb’s letter, part of what he is specifically attacking with Intel is the type of culture in the business. I was really impressed when he noticed how many top engineers they just let go. And we said in the program, I don’t know how much it costs to retain these people, but you know, half a million dollars or a million dollars in stock options is nothing for an Intel-sized company.
What kind of changes do you think needs to happen or could even happen in a company as big and entrenched as Intel to fix these cultural problems, which again, I think, the market looks at AMD and NVIDIA and says it’s here that innovation happens for you know, everyone– you know, Jensen Huang and Lisa Su. They love it, right? The market loves these leaders. What can Intel do to try to get some of that, you know, get some of that love, I think?
DANIEL NEWMAN: That’s a great question. Remember, it was not long ago that AMD was on the brink and its shares were trading at around $ 1. So we all know that big, strong companies can make course changes and can quickly get back on track. And that is what Intel will have to do. Intel really needs to be able to deliver on the promise with its breakdown strategy, those chips I mentioned. He made large investments in AI. He acquired a company called Habana this year. AWS really started rolling out some of these Intel AI workloads and is in the public cloud and in its cloud.
But the issue of talent is a big question mark. The company needs to attract the best talent. You need to start at the top of the organization. The company made some major changes. Some of them are beginning to bear fruit. In fact, the engineering director was left to try to change the culture. I don’t know if it was Murthy’s fault that everything went wrong. The 14 to 10 nanometer problems kind of came before your time at Intel.
But at the same time, making these changes at the top of engineering and across the organization will be what investors will be looking for, what the market will be looking for, what OEMs who are buying from Intel will be looking for because, at this point, it is about preserving market share. He had some market share as his notebook CPU was eroded. AMD has been great there. We saw NVIDIA grow in the AI space. And then, the data center space was probably the strongest area that Intel really needs to figure out how to preserve and protect.
And I mentioned AWS, and we heard rumors about Microsoft and, of course, there’s the NVIDIA arm contract. So the pressure is coming from all angles and I think Intel needs to invest, but the company still generates strong cash flow, big profits, and it’s a time when it can still invest. And if you can get your operations on track quickly, you may see a turn very similar to the one AMD went through, which can really throw stocks and the company back into happier and more supportive spaces within the investor community.
BRIAN SOZZI: In the broader chip space, Daniel, how big is the threat that Apple, Google and Amazon are making their own chips? How big is the threat to this year’s investment thesis on AMD and NVIDIA?
DANIEL NEWMAN: Well, I think that as a whole, we are seeing this type of chip developed internally, you know, a thesis or the development of a chip developed internally. AWS was probably the first, and that’s Amazon Web Services. He started making chips, he is known in his AI space Trainium and Inferentia. It is continuing to build more of these types of homemade chips. We heard that Alibaba is doing this. Microsoft is the newest commented chip. And this has been very much based on Arm.
And now, of course, we have the NVIDIA Arm business, which I believe is one of the biggest things to look at in the semiconductor market in 2021. This business is huge. This will have large and lasting impacts across the semiconductor industry. This will put NVIDIA in a position of enormous growth. It will also have a prolonged effect on the other competition in space.
You will probably see many regulators looking closely at this deal to see if it should take off. And, of course, AMD made the acquisition of Xilinx expanding its capacity, its TAM and its overall opportunity in 2021. I hope that the deal is completed.
So there are some important things going on, be it the chips developed internally by the big players in the cloud, or the expansion of Arm and NVIDIA, the expansion of AMD. We are seeing Qualcomm, which has just launched a basic 5G chip. In fact, it came out today. It was announced, his 480 series.
Therefore, all of these companies continue to pressure. So I think Intel has what it takes, but it will have to operate and actually perform almost perfectly in the future, because I don’t think there is much room for error, given what has happened in the past two years.
JULIE HYMAN: Well, regardless of that, it looks like you’re going to have a busy year, Daniel. Thank you for being with us and sharing some of your thoughts today. We will talk to you soon. Daniel Newman, Futurum Research, principal analyst, thank you.
DANIEL NEWMAN: Thanks for receiving me.