Daniel Newman, chief analyst at Futurum Research, joins Yahoo Finance Live to discuss why activist investors are targeting Intel and what lies ahead for the disc maker.
Video transcription
JULIE HYMAN: Intel shares about 2% today. The stock recently got a boost after Daniel Loeb’s Third Point took a stake in the company, about $ 1 billion, and he is pushing for some changes, including perhaps that Intel should move away from making its own chips. To talk more about this, Daniel Newman, now of Futurum Research, joins. He’s a chief analyst there.
So Daniel, this is interesting, and just as a background for people, a lot of the chip makers are so-called ‘fab-less’ chips. In other words, they design the slides, but they do not make them all home. Intel, on the other hand, makes most of its chips in-house. And I think Loeb sees this and many other investors currently see it as a disadvantage. Is this a disadvantage, and would Intel do well to pull away from the model?
DANIEL NEWMAN: Yes. First of all thank you for having me. Happy New Year. It was a very late end of the year for Intel to have Dan Loeb and his fund appear with this memo. You know, I think Intel can definitely benefit from a better job of reassuring its investors of its strategy of letting them know what the company is doing.
I think it’s a little inaccurate to say that they do all their own manufacturing. Intel has been doing some of its manufacturing outside its own factories for years. And you know, I think it’s going to be something the company can continue to use to differentiate itself.
But he also has a point. I mean, the company was slow to see the same kinds of movements in the market as its competitors, namely AMD and NVIDIA. Both trade north at 50 times their price – their PE ratios, while Intel has about 10. This has a lot to do with the fact that there is some confidence in the market.
The company faced many challenges, from its 14 nanometers to its 10 nanometers. This caused problems in the factories. A reconsideration had to be done to meet the yield and meet the demands. And all of this has started to increase, and trust has become a problem in the investor community.
That said, the company is an integrated – an IDM – and has a strategy. It is increasingly moving towards this chiplet or towards these smaller, less monolithic designs that need to be able to handle its own factories. And it could also benefit from using a more hybrid model as Loeb suggested.
So I think it’s somewhere in between. I do not see the spin-off happening. And I think Intel has actually investigated that already. So there was not much new for me, but I think an activist should come in and say that we are going to get involved here, definitely you saw a boost in market confidence because the price went up immediately.
MYLES ABROAD: And Daniel, I think if you look at Loeb’s letter, the culture of the company is part of what he’s specifically attacking with Intel. It really struck me when he noticed how many top engineers had just let them walk away. And we said at the show: I do not know what it costs to retain these people, but you know that half a million dollars or a million dollars in stock options is nothing for a company like Intel.
What changes do you think need to take place or may even happen at a company as large and entrenched as in Intel to address these cultural issues, which, I think, the market is looking at AMD and NVIDIA again and saying this is where innovation takes place ? because you know, everything – you know, Jensen Huang and Lisa Su. They love it, right? The market loves these leaders. What can Intel do to try to get rid of it, you know, I get from that love?
DANIEL NEWMAN: This is a wonderful question. Remember, it was not so 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 change prices and get back on track quickly. And this is what Intel is going to have to do. Intel really needs to live up to its promise with its breakdown strategy, the chipsets I mentioned. It has made huge investments in AI. It acquired a company called Habana this year. AWS has actually started implementing some of this AI workload from Intel, and it’s in the public cloud and its cloud.
But the talent thing is a big question mark. The business must attract the best talent. It should start at the very top of the organization. The company has made some major changes. Some of these are beginning to bear fruit. The chief engineer had to actually leave to try to change the culture. I do not know if it was Murthy’s fault that everything went wrong. The problems between 14 and 10 nanometers came before his time at Intel.
But at the same time, the changes at the top of engineering and throughout the organization will be what investors will look for, what the market will look for, what the OEMs who buy from Intel will look for, because it’s now about maintaining market share. The market share of CPUs for notebooks has eroded. AMD was great there. We’ve seen NVIDIA rise in the AI space. And then the data center space was probably the strongest area that Intel really needed to figure out how to store and protect.
And I mentioned AWS, and we heard rumors about Microsoft, and of course there’s the NVIDIA arms deal. So there is pressure coming from all angles, and I think Intel needs to invest, but the company is still generating a strong cash flow, good profits, and it is a time that it can still invest. And if he can get his options up and running quickly, it could see a turnaround like what AMD went through, which could really bring the stock and the company back into a happier, more supportive space within the investor community.
BRIAN SOZZI: On the chip space expander, Daniel, how big is the threat that Apple, Google, Amazon are believed to be making their own chips? How big is the investment thesis on AMD and NVIDIA for the investment?
DANIEL NEWMAN: Well, I think on the whole we see this kind of homemade chips, you know, thesis or this homemade disk development taking place. AWS was probably the first, and that’s Amazon Web Services. It started making chips, it’s known in its AI space Trainium and Inferentia. It continues to build more of these types of homemade chips. We have heard of Alibaba doing this. Microsoft is the latest rumor mill. And it’s very much based on Arm.
And now, of course, we have the NVIDIA Arm agreement, which I think is one of the biggest things to look at in semiconductor space by 2021. This agreement is huge. This will have major, lasting consequences for the semiconductor industry. This will put NVIDIA in a tremendous growth position. It will also have a lasting effect on the other competition in space.
So you will probably see that many regulators are looking very closely at this transaction to see if it should start. And of course, AMD has expanded the Xilinx acquisition to expand its capability, its TAM and its overall opportunity in 2021. I expect the deal to succeed.
So there are some big things happening, whether it’s the homemade chips by the big cloud players, or whether it’s Arm and NVIDIA expansion, AMD’s expansion. We see Qualcomm, it has just launched an entry level 5G chip. It actually came out today. It has been announced, their 480 series.
All these companies therefore continue to exert pressure. So I think Intel has what it takes, but it will have to work and really go forward virtually flawlessly, because I do not think there is much room for error given what has happened in the last few years.
JULIE HYMAN: Well, regardless, it sounds like you’re going to have a busy year, Daniel. Thank you for being with us today and sharing your thoughts. We’ll talk to you soon. Daniel Newman, Futurum Research, chief analyst, appreciates it.
DANIEL NEWMAN: Thank you for having me.