Despite a general surge in technology stocks this year, there was one major notable exception Intel (NASDAQ: INTC). Chipzilla, long known as the dominant player in the computer processing space, saw that the gap against competitors would deteriorate further this year due to internal technological problems, and the stock responded by falling 14.7% in 2020, including dividends. This is a huge underperformance against the semiconductor sector, which rose by 55.5% last year.
INTC 1 year total returns (daily) data by YCharts
Intel’s underperformance and valuation of just 9.75 times the bargain bargain of the basement recently attracted activist investor Dan Loeb to invest about $ 1 billion in Chipzilla, after which Loeb sent a serious letter to Intel’s chairman in which he made major changes claim.
Although Intel’s shares jumped on the news, I would still recommend staying away from Intel for the following reasons.
An activist will not solve Intel’s problems. Image Source: Getty Images.
What Loeb said
Upon reading Loeb’s letter to Intel’s chairman, there seems to be no new news there. In fact, Loeb has only disputed Intel for losing its production lead over the past seven years, while offering no real solutions other than maintaining a reliable investment advisor to evaluate strategic alternatives, including whether Intel is an integrated manufacturer of devices must remain and the possible sale of certain failed acquisitions. ”
Yes, Loeb’s point that top management was paid far too much while the company was declining on production is probably correct, and it can therefore make meaningful cost savings. However, Loeb’s mere indication of the obvious will not help Intel’s inventory. Furthermore, Intel is already considering outsourcing some of its manufacturing to outside factories. Meanwhile, the sale of its own manufacturing could save the company in the short term, at which point Loeb could simply sell its share while harming Intel’s long-term competitiveness.
Stuck between a rock and a hard place
Not too long ago, Intel was the envy of the chip world, and often ahead of competitors in the production of leading processors. More and more in the industry, however, went for a ‘fabless’ model, in which companies would only design chips and outsource the complicated and expensive tasks of manufacturing to other foundries. It allowed Taiwan Semiconductor Manufacturing (NYSE: TSM), the largest outsourced foundry by volume, to gain manufacturing expertise and jump ahead of Intel and reach 7nm production before Intel could reach its 10nm chips – which for some reason equals TSM’s 7nm.
Taiwan Semi is already producing 5nm chips, while Intel announced another delay this summer with its equivalent 7nm chips until 2022 or 2023. This will leave Intel a few years behind, and indeed in a precarious position.
In other words, part of what made Intel great is now the biggest liability. Therefore, the company is in between a difficult place. If he sells his factories and goes fabless, it could overtake his competitors in terms of disk density; However, Intel would sacrifice the very differentiated advantage that gave it an edge in the beginning.
“Exemption” seems like a short-term solution to a long-term problem
Loeb’s other argument is that Intel should consider a possible rejection of certain failed acquisitions. ‘Loeb probably has an eye on the Altera unit, which makes field-programmable gate arrays, or custom slides, or Mobileye, the autonomous management software unit.
And yet, if Intel was so late in acquiring Altera at the end of 2015, why did the CPU compete? Advanced micro-devices (NASDAQ: AMD) buy only Altera competitor and co-FPGA manufacturer Xilinx? It seems clear that there are some advantages to being able to host both CPUs and FPGAs under one roof and to coordinate systems on the chips with both types of processors.
Meanwhile, Intel has actually sold non-strategic assets, and recently sold its NAND flash business to SK Hynix and also to sell its $ 314 million stake in a large data platform Cloudera in the last few months.
So it seems that Intel is already doing something that Loeb suggests. That said, selling anything but CPUs looks like a battle ax as a scalpel is probably best.
What Intel needs
This is what Intel needs to do: fix what it fixed, and go back to the best leading chips in the world. It will likely take new leadership, or at least a new culture that attracts the best technology talent to want to work at Intel over competitors. I agree with the former founder of Cypress Semiconductor, TJ Rodgers, who recently appealed to Intel on CNBC.
Intel may have to use a few outsourced factories in the meantime to catch up with its competitors, but a wholesale of its strategic assets will not make it any more competitive in today’s super-competitive technology industry.
This solution, of course, will not be easy and it will not happen overnight. This will certainly not happen if the company starts selling parts of itself. Meanwhile, Intel looks set to lose market share in notebook and cloud processors next year, while working to repair the ship. During that time, the share price is likely to remain depressed.
Therefore, I will continue to stay away from this seemingly cheap stock until new leadership comes in, or a new direction is set out more clearly.