As a tech reporter going back over 40 years, it’s incredible to be writing this.
But can Intel (NASDAQ:INTC) survive?
What was once the world’s dominant semiconductor power is a shell of its former self. It’s all there in the second quarter earnings report, which led it to lose 43% of its value in just one month.
The loss of $1.6 billion, 38 cents per share, is just the headline. Now nearly 20,000 employees are heading for the exits. The dividend has also been suspended. Shareholders are suing, claiming they weren’t told how bad the trouble was.
The Trouble Is Bad
Pat Gelsinger returned to the company where he’d first made his career as CEO in 2021, determined to remake Intel as a first-class chip foundry, not just a design house.
It’s not working. The Foundry isn’t cost-competitive with Taiwan Semiconductor (NYSE:TSM). Yields are bad. Chips that were due to arrive in 2025 may not arrive until 2027.
The design house is worse. PC processor chips are failing. Its Gaudi Graphics Processing Unit (GPU), meant to compete with Nvidia (NASDAQ:NVDA), doesn’t. That chip isn’t even made by Intel but by TSMC.
My saying “I told you so” over 20 years doesn’t help anything. Intel blew its opportunities in phone chips, modems and memory under a succession of marketing and finance leaders. Gelsinger was chief technology officer (CTO) before his 2009 departure to VMware, but 12 years is a lifetime in tech terms.
Gelsinger’s foundry failures have a political dimension. Intel got $8.5 billion in U.S. government money for building its new foundries in Arizona and Ohio. There is also an Investment Tax Credit of up to 25% on its $100 billion of investment, and it’s eligible for $11 billion in government loans. The failures of Intel Foundry are on us and could kill the whole U.S. move into manufacturing if Republicans resume control of Washington.
Help!
Nvidia is just one of the companies desperate for Intel to succeed. It can’t get all the supplies it needs from TSMC. Intel is now in a race with Samsung (OTCMKTS:SSNLF), which already supplies Apple (NASDAQ:AAPL), to deliver them.
Intel’s efforts are kept afloat by borrowing. Long-term debt was over $48 billion at the end of June. There’s also $4.7 billion in short-term debt. Intel had nearly $15 billion in new financing during the second quarter while putting $11.6 billion into capital spending. The Intel Foundry lost $2.8 billion during the quarter. Intel has also tapped private equity, which owns almost half the profits from new foundries.
If you think Nvidia or a Cloud leader like Microsoft (NASDAQ:MSFT) might be sniffing for a bargain, forget it. The “enterprise value” of Intel includes its debt. The price of buying this mess isn’t $84 billion. It probably starts at $150 billion. Then you will have to run it and take losses already built in.
The problem is what I call “Moore’s Second Law.” It’s true that chip densities, speeds and thus cost-efficiency double as circuit lines grow closer. But the cost of setting up production also doubles along with this efficiency. The industry is losing the ability to produce what it can design. Maybe that’s the real end of Moore’s Law.
The Bottom Line
Investors sitting on losses may be tempted to throw in more cash. At a minimum, you will reduce your cost basis in the stock.
But there are no guarantees. Even with $10 billion in cost cuts, Gelsinger isn’t promising profits before 2026. Even if Intel does show a profit, the AI ramp-up may be over before it gets into gear.
Intel is too essential to fail. What Gelsinger calls Intel’s “death march” is taking longer than anyone anticipated, and the U.S. needs it to get the foundry right.
You’re paying for this with your tax dollars. But you may want to think twice before adding new investment dollars to the pot.
On the date of publication, Dana Blankenhorn held a LONG position in INTC, TSM, AAPL, and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
