Intel (NASDAQ:INTC) stock has been thrust firmly back into the spotlight after the company reported earnings July 23.
CEO Robert Swan put the best face on it. He talked about the earnings: “We exceeded our guidance by $1.2 billion on the top line and 13 cents on the bottom line. Our data-centric businesses grew 34 percent and drove approximately 52 percent of the company’s revenue, and our PC-centric business grew 7 percent.”
Seen in isolation, Intel’s most recent earnings were spectacular. Non-GAAP earnings of $1.23 per share, 16% ahead of last year, on revenue of $19.7 billion. Add to that $10.6 billion in free cash flow and $2.8 billion paid out in dividends.
Yet INTC stock was hit with a hammer. Its shares, which traded at $61 a week ago, before earnings, open July 29 at $49.30. The dividend now yields 2.66%. Intel’s price-to-earnings ratio is 9x. (Rival Advanced Micro Device’s (NASDAQ:AMD) P/E is nearly 160.)
What’s Going On With INTC Stock?
Swan dropped the bomb near the end of his earnings announcement. “We are seeing an approximate six-month shift in our 7nm-based CPU product timing relative to prior expectations,” he said. That’s a mealy mouthed way of saying Intel can’t get the latest chip production technology working.
“[W]e have also invested in contingency plans to hedge against further schedule uncertainty,” he added. That means Intel is now going to buy production from its manufacturing rival, Taiwan Semiconductor (NYSE:TSM). It would be like Ford (NYSE:F) CEO Jim Hackett saying he didn’t know how to make his new pick-up and it would be made by Toyota Motors (NYSE:TM).
It wasn’t just what Swan said, but the way he said it that stunned me. He didn’t state it like a leader. He hid it like a bureaucrat. “I don’t have a reason to buy Intel,” said TV analyst Jim Cramer. “Intel has zero-to-no chance of catching or surpassing … [Taiwan Semiconductor] at least for the next half decade, if not ever,” Susquehanna analyst Chris Rolland wrote.
Heads rolled on the manufacturing side, including the chief engineering officer. But the head that should have rolled didn’t.
Robert Swan’s head didn’t. Intel can’t be great again until it does, neither can INTC stock for that matter.
What Intel Needs
The lesson of the last two decades is clear. Chip-making is an entrepreneurial business.
Intel hasn’t had an entrepreneur at the helm since the late Andrew Grove retired in 1998. His successor, Craig Barrett, is even listed in Intel’s official history as “transitional.” Barrett’s successor, Paul Otellini, didn’t even have a technical background. Otellini’s successor, Brian Krzanich, was an absolute disaster who turned Intel’s executive suite into Game of Thrones and left it with no bench to speak of. (Is it telling that Swan’s biography isn’t on this page?)
Meanwhile, Jensen Huang had founded Nvidia (NASDAQ:NVDA) in 1993. AMD recruited Dr. Lisa Su and made her CEO in 2014. Both are entrepreneurial. Both are engineers. They’re product people. They’re leaders.
Robert Swan comes out of finance. He’s the guy Fredric March played in Executive Suite back in 1954 . As Meredith Wilson wrote in The Music Man, he doesn’t know the territory.
I know Gordon Moore isn’t walking through that door. Moore is 91. But he’s also not yet dead, and neither is Intel. Not if they can find a great engineer, put them in charge, let them build a team and lead. The problem is that Intel may be too big, too bureaucratic, maybe even too profitable to do what’s necessary to win again.
The Bottom Line on Intel
The alternative to Intel winning is for Nvidia to lead.
There are reports Nvidia is kicking the tires on ARM Holdings, the chip designer Softbank (OTCMKTS:SFTBY) bought in 2015. There are also critics saying Nvidia buying ARM would make that company a monopolist, like Intel. Nvidia’s market cap recently passed that of Intel.
I say, let them be a “monopolist,” because they can’t be. Right now, China is the leader, Taiwan is the leader. But the U.S. must lead to have any hope of beating China in this century.
Intel can’t do it. Maybe Jensen Huang can.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in TSM and NVDA.