By Greg Lai and Alex Hsiao, Co-Chief Investment Officers
Intel is at a critical juncture, with its latest earnings report raising serious doubts about the company’s future trajectory – Intel’s Moore’s Law became the golden rule for the electronics industry in which computing power would dramatically increase while relative cost would decrease exponentially. In Q2 2024, Intel posted a loss per share of $0.38, a sharp drop from last year’s $0.35 per share earnings, missing the estimates by $0.27. Revenue for the quarter came in at $12.8 billion, down 1% year-over-year, and fell short of market expectations by $148 million. Perhaps what’s even more concerning is Intel’s forecast for Q3 revenue, which is reported to land between $12.5 billion and $13.5 billion, far below the analyst consensus of $14.4 billion. As a result of this underperformance, Intel’s stock price suffered a steep decline, plunging by 60% and leaving investors questioning the viability of CEO Pat Gelsinger’s turnaround strategy.
The challenges Intel currently faces are not the result of a single day’s missteps. Their root causes can be traced back to its recent history. Once a dominant force in the semiconductor industry, Intel should have been in an ideal position to ride the wave of the artificial intelligence boom. Its strength in producing chips for data centers, which were vital to AI infrastructure, could have solidified its leadership. However, looking back at its history, the company seems to have made too many momentary lapses in judgment. Whether it was pursuing the shortsighted wrong strategies or simply being unlucky with its bets, Intel failed to adapt to crucial shifts in semiconductor architecture needed for artificial intelligence, missed the mobile chip boom ignited by the iPhone’s launch in 2007, and passed on the opportunity to invest early in promising ventures like OpenAI. This series of missteps left Intel overlooking key opportunities in AI, causing it to fall behind in technological innovation while its competitors surged ahead.
Under all this pressure, Pat Gelsinger stepped in as Intel’s CEO in 2021, determined to reverse the company’s downward trajectory and steer it away from these troubling trends. Pat Gelsinger has pledged to return Intel to its historic position in the heart of Silicon Valley by transforming the operations of advanced chip manufacturing plants. Gelsinger’s plan was once seen as a beacon of hope for Intel’s recovery and future growth. However, as the company continues delivering weak earnings reports, analysts have questioned its effectiveness. While the overall strategy may have made a lot of sense, the current trajectory of the business doesn’t seem to provide the necessary support for Intel to stay on track. The company urgently needs capital to continue its development and deliver on its promises. Still, it’s becoming increasingly difficult to secure new funding as investor confidence has been shaken and many are taking a wait-and-see approach.
In response to its ongoing struggles, Intel has outlined several drastic measures aimed at reducing costs and shoring up its balance sheet, hoping to free up internal funds to fuel its recovery plan and push the company forward. By posting the Q2 earning report, the company announced that it plans to suspend its dividend in Q4 2024, underscoring the depth of its financial strain. In addition, it also announced during the Q2 earnings call that it will cut 15% of its workforce by the end of 2025 as part of a broader initiative to slash $10 billion in spending. Besides, Intel is also exploring options to divest non-core assets to improve its financial health. The company is considering selling part of its stake in Mobileye, an autonomous driving technology company it spun off and listed in 2022. Another potential asset sale could involve its programmable chip division, Altera. Gelsinger has been clear that Intel must adjust its cost structure to align with its new operating model, signaling that the days of aggressive expansion are over for now.
Despite these efforts, investors are still concerned that the company’s widening losses and high burn rate could further erode shareholder value. While Gelsinger’s cost-cutting measures and divestment strategies might offer short-term relief, there’s uncertainty around whether these actions conflict with his original recovery plan for Intel. The company urgently needs to demonstrate that it is still on the right path, but time appears to be running out for Gelsinger and Intel. We can’t deny that Intel has made significant efforts to turn things around, and recently, there have been signs of progress, such as the development of its most advanced manufacturing process, called 18A. However, according to a Reuters report, 18A failed the test from Broadcom (AVGO) and is said to be “not yet ready for high-volume production.“ The market is scrutinizing every step Intel takes, waiting for clear, tangible signs of improvement to restore confidence and give the company a chance to prove itself. As mentioned earlier, Intel stands at a critical crossroads, where the outcome will determine whether it will be phased out or rise from the ashes. Everything will be determined by Intel’s next steps in development and the actual outcomes they deliver in the near future.
Advisory Services offered through Sowell Management, a Registered Investment Advisor. Trek Wealth Solutions is a division of Sowell Management. The views expressed represent the opinion of Trek Wealth Solutions. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Information provided on this website is not intended to be, nor should it be construed or used as investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest in any security or cryptocurrency. Past performance is not indicative of future results, and investing in securities involves risks, including the potential loss of principal. Be sure to consult with a tax, legal, or financial professional before implementing any investment strategy. While Trek Wealth Solutions and Sowell Management believe the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Trek Wealth Solutions and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
