Intel: Take A Deep Breath
Contributor since 2013 / 3151 Followers
Summary:
- We disagree with the firing of Patrick Gelsinger as Intel Corporation’s CEO.
- Considering that the timeline for delivering a turnaround was 2025 to 2027, the action appears vexing.
- Patrick Gelsinger is likely to be reinstated as CEO at Intel, in our opinion.
- Longer-term, given business and industry dynamics, INTC’s future appears solid.
- We are maintaining our $33/share price target and buy rating on INTC’s shares.
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Investment Conclusion
We disagree with Intel Corporation’s (NASDAQ:INTC) Board of Directors’ (BOD) decision to oust Patrick Gelsinger as CEO of the company. INTC has come a long way under his leadership – five new chip manufacturing nodes; new CPUs, AI accelerators, and a GPU focused on the AI opportunity; construction and update of foundries; injection of external capital into the foundry segment; reshuffle of the corporate suite; and a significantly downsized workforce. The timeline for INTC business turnaround was 2025 through 2027. Therefore, it made little sense to change leadership, when the company appeared on the runway for a rebound.
We believe the issue is about a complete separation of INTC’s products and foundry businesses. Patrick Gelsinger had often shared that he had indicated to the BOD before ascending to the CEO role that they should consider a private equity (PE) executive if the objective was to split the company. He said that he was rooting for IDM 2.0. In our opinion, Patrick Gelsinger’s strategy appears prudent, as it is mandatory for INTC’s turnaround that Intel Products continues as the primary customer of Intel Foundry as the division’s business ramps. By contrast, some on Wall Street and among the BOD, envisioned the spinning off of Intel Foundry as a separate entity.
In that regard, it is noteworthy that INTC’s BOD consists of 12 members, a mix of academicians, Wall Streeters, and corporate executives with varied backgrounds. No one on the BOD has the length of tenure at and understanding of INTC as Patrick Gelsinger. This is considering that he was a protégé of Andy Grove (who drove INTC’s dominance of the chip industry), and that he has held leadership positions across multiple INTC divisions for over thirty years.
We have performed an analysis of the shortlisted candidates suggested for succeeding Patrick Gelsinger. In our judgment, their professional backgrounds appear grossly inadequate compared to Patrick Gelsinger’s in regard to potentially contributing to the turnaround of INTC. Therefore, it is likely that top investors might bear upon the company’s BOD to reinstate Patrick Gelsinger as CEO of INTC. This has happened before and appears to be an appropriate resolution of the fracas currently unfolding at INTC.
Net-net, although we are cognizant of the uncertainty surrounding the company over the near term, we remain confident that over the longer term, given business and industry dynamics, INTC will pull through. In addition, considering that the $33/share Price Target we introduced on INTC’s stock, when we initiated on the company in September, was based on a 10-year Discounted Cash Flow valuation rather than a short-term market multiple, we are maintaining our Price Target. Reiterating Buy Rating as well.
INTC’s Business As It Stands Today
The company has come a long way since 2021. Today, both the foundry and product segments are on the runway, potentially positioned to deliver. In addition, INTC’s preparedness to deliver AI semiconductors positions the firm to benefit from the clamor for chips, across the globe. Below, we present a back-of-the-envelope analysis of the two businesses in the cross-hairs of the current impasse at INTC.
Intel Products
INTC still leads the PC CPU market on a global basis. To maintain its leadership of the PC processor market, the company has gone all out to rapidly launch AI chips for the segment, including Raptor Lake, Meteor Lake, and Lunar Lake. The Lunar Lake CPU provides 45 TOPS (trillions of operations per second) of neural net processing. Its Panther Lake AI CPU, to be introduced in 2025, will provide 50 TOPS of neural net processing versus Qualcomm’s (QCOM) Snapdragon X Elite’s 48 TOPS, and Advanced Micro Devices’ (AMD) Ryzen Strix Point’s 45 TOPS of neural net processing.
Regarding server CPUs, INTC has debuted its Xeon 6 Sierra Forest e-core built with 128 cores. Its upcoming Granite Rapids p-core server CPU will include 144 cores, and its Clear Water Forest e-core to be introduced later in 2025 will comprise 288 cores, compared with primary competitor AMD’s EPYC server CPU built with 128 cores. INTC’s Gaudi 3 line of AI accelerators boasts a superior price/performance profile to Nvidia’s (NVDA) H-100 GPU and is highly competitive with AMD’s M1300X. Further, next year INTC will launch its Falcon Shore discrete GPU, which is positioned to compete with NVDA’s Blackwell range of GPUs.
In the context of competition with NVDA, it is notable that both companies are on separate trajectories. INTC is focused on promoting its products for training medium to small language models associated with businesses and sovereign data centers, whereas NVDA’s predominant intent is training and inference workloads related to large language models belonging to cloud hyperscalers. In addition, INTC is focused on: providing processors for inference workloads that require relatively lower compute than training workloads; sustaining its leadership of the PC CPU segment; and edge computing.
INTC and NVDA differ in additional areas as well. INTC’s approach to architecture is disaggregated, permitting CPUs, GPUs, and AI accelerators from external foundries to be included in their system of chips (allowing companies and designers to mix and match chips based on their respective requirements), whereas NVDA’s policy is monolithic, limited to including only NVDA products on its server racks. In addition, INTC’s software optimization programs are open-sourced, while NVDA’s offerings are optimized on CUDA, its proprietary GPU programming application.
Further, INTC’s chips utilize the Ethernet for networking purposes, while NVDA deploys InfiBand to connect its offerings. Ethernet is less expensive and provides higher bandwidth, while InfiBand sidesteps the data congestion issue, but is associated with lower bandwidths which reduces efficiency and comes at a higher price point. Moreover, INTC’s recent processors offer superior energy efficiency compared to NVDA’s chips. However, NVDA’s semiconductors offer top-of-the-line data processing power and speed.
Overall, by the middle of 2025, INTC products will have caught up with the competition regarding prowess.
Intel Foundry
There are only a handful of large chip-manufacturing foundries in the world. There are INTC’s plants in Arizona, Oregon, Israel, and Ireland; Taiwan Semiconductor Manufacturing Company’s (TSM) (TSMC) facilities in Taiwan, Japan, and Arizona; and Samsung’s factories in South Korea and Texas.
Regarding the actual production of INTC’s semiconductors, the company has upgraded its process nodes, launching 7nm, 4nm, and 3nm chips, since 2021, and is expected to introduce its 2nm and 1.8nm chips by YE24. Looking ahead, INTC’s process roadmap includes 1.4nm chips by 2026, and 1nm chips, shortly thereafter. Beginning with the 1.8nm chip, all INTC chips will be integrated with the firm’s cutting-edge chip technologies: RibbonFET (gated-all-around), PowerVia (back-side power), and Foveros Direct (vertically stacked transistors).
In that regard, TSMC’s and Samsung’s most recent processors are sized at 3nm, and both companies appear on track to launch 2nm chips in 2025. Additionally, TSMC will introduce a 1.6nm semiconductor in 2026, and Samsung a 1.4nm version in 2027. In the context of cutting-edge chip technologies, TSMC’s processors already come with gated-all-around technology, whereas Samsung’s do not. Regarding back-side power, Samsung has shared that its 1.4nm chips will be integrated with the technology. Given competitive conditions, by YE24, INTC will have reclaimed its leadership position in chip manufacturing regarding processor specifications.
Cognizant of significant potential market demand for its semiconductors, INTC is constructing new foundries and upgrading/expanding its existing foundries. In that respect, the company is building fabrication plants in Ohio and Ireland at a cost of $18 billion and $20 billion. In addition, projects to update INTC’s chip manufacturing facilities in Oregon and New Mexico are ongoing.
Furthermore, considering potential chip demand, it is important to note that given geopolitical concerns, the U.S. government is focused on bringing home chip manufacturing from East Asia, where 80% of existing semiconductor production is presently located. In that regard, in association with the CHIPS Act, the U.S. administration has injected $8 billion into INTC’s under-construction fabrication plants. The company has announced that its objective is to become the world’s second-largest manufacturer of processors by 2030, wresting the position from Samsung. Considering the dynamics described above, INTC appears to demonstrate a fighting chance to deliver on its promise.
Cumulatively, given the significant efforts that have been expended for a bottom-up overhaul of INTC’s business since 2021, and the breadth of deliverables achieved regarding both Intel Products and Intel Foundry, we are upbeat about the company’s long-term future.
Bottom Line
BODs, particularly those that have been at the helms of companies since before turnaround efforts were implemented, yield substantial power, and often clash with top leadership executing the rebound strategies. Historically, there have been instances of CEOs who were delivering being booted out by the BOD of their companies. Sam Altman’s run-in with OpenAi’s BOD in 2023, comes to mind. In addition, Steve Jobs was famously ousted from Apple. Both were reinstated to their positions, following further deliberation.
In the context of INTC, the company’s culture is broken, and its BOD is similarly a throwback to INTC’s glory days. Still, historically large public companies demonstrate sufficient chutzpah to survive and thrive in the turmoils they encounter over their lifecycles. We would be buyers of INTC’s shares as the stock potentially dips further on continued uncertainty surrounding the company.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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