Intel Corp CEO Pat Gelsinger, who took the job in February 2021, gives himself an A- grade for his first year running the chipmaker.
Investors are proving to be tougher graders.
No one is faulting the 60-year-old’s energy level and ambition. But he’s trying to reshape the competitive landscape of the US$500 billion chip industry, turn around its most iconic company, and change industrial policy in the U.S. and Europe -- at a pace he likes to call “torrid.”
And the plan is going to be expensive. Very expensive. In Ohio, Gelsinger is spending US$20 billion to build the world’s biggest chipmaking facility. He’s also planning an expansion in Europe, making deals and ramping up research spending -- weighing on Intel’s once-dependable profit margins. That’s testing the patience of investors, who have sent the shares down 22% in the past year.
Just this week, Intel agreed to buy Tower Semiconductor for US$5.4 billion, part of a push into making chips on a contract basis for other companies.
In a Bloomberg Television interview, Gelsinger acknowledged that Intel’s comeback won’t happen overnight but slammed Wall Street analysts for sticking to a negative view. The executive said he’s “p---ed” off at what he calls perma-bears. But Gelsinger believes that others are getting excited about the company restoring its prowess and creating “the new old Intel.”
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“In some regards, we’re ahead of where I thought we’d be; in some areas, we’re not as far as I thought we’d be,” Gelsinger told Emily Chang in a “Bloomberg Studio 1.0” conversation airing Wednesday night. “And it really is more a statement of the massive challenge in front of us.”
This is Gelsinger’s second stint at Intel, having spent decades at the chipmaker before leaving to run VMware Inc. in 2009. When he returned as CEO last year, the hope was he could chart a new course -- but also remember what made Intel great in the first place.
Within a few weeks of rejoining the company, Gelsinger outlined an aggressive strategy aimed at reclaiming the manufacturing leadership that his predecessors had allowed to slip. He followed that up with his plans to rebuild production in the U.S. and Europe, aiming to counterbalance a shift of manufacturing to Asia. He’s also lobbied for billions of dollars in government support.
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But it could be an uphill fight. Longtime underdog Advanced Micro Devices Inc has become a fierce competitor, and some of Intel’s most prized customers -- including Apple Inc -- are developing their own chips.
For now, investors such as NZS Capital are taking a wait-and-see approach.
“I think he deserves good marks for what he’s done,” said Jon Bathgate, a fund manager at the firm in Denver. “But the lift is just extremely heavy, and people that think that this can be resolved in a handful of quarters -- even a handful of years -- probably don’t understand the challenges that he was facing coming in in the first place.”
Bathgate said NZS isn’t investing in Intel because there are other companies that are “firing on all cylinders.” Intel will have to show better financials, prove it can land big outsourced chip customers and stop losing market share, he said.
Other investors agree. Intel’s performance over the past year puts it at 27th in the Philadelphia Stock Exchange Semiconductor Index of 30 stocks. And its shares have declined sharply each time Intel has reported earnings -- a sign investors aren’t happy with Intel’s progress.
Take Intel’s gross margin -- the percentage of revenue remaining after deducting the cost of production -- a key sign of health for a manufacturing company. It’s expected to be about 52% this year. That figure would be stratospheric in the automotive industry, but it’s 10 percentage points below Intel’s historical levels. It’s also below those of some peers. Texas Instruments is close to 70%, and AMD -- not known for its fat margins in the past -- reached 50% last quarter.
On Wednesday, the shares slipped less than 1% to US$48.23. Intel will have a fresh opportunity to win over investors on Thursday, when the chipmaker holds its investor meeting.
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Gelsinger’s efforts won praise from Third Point LLC’s Daniel Loeb on Wednesday, who said in an investor letter that the chipmaker could “deserve a second look.”
“We are encouraged by Intel’s aggressive investment plan,” he said. “We knew from the start that Intel’s turnaround would be complex and lengthy, and we have been pleased to see Mr Gelsinger sacrifice near-term earnings for long-term growth.”
In many ways, Gelsinger is trying to turn back the clock and restore Intel to what it looked like in 2009, when he left to run VMware. Back then, the computer industry bought Intel chips because they had to: Its Xeons and Core processors were so much better than the few viable alternatives. That position gave Intel a level of profitability that was the envy of the chip industry and enough cash to let it spend more than any rival on technology and manufacturing.
Gelsinger started his career at Intel in 1979 and was the lead architect of the original 80486 chip. He likes to say he “went through puberty there,” working for chip-industry pioneers like Gordon Moore and Andy Grove.
But these days, the company is playing catch-up. Gelsinger plans to spend as much as US$28 billion on new plants and equipment this year, up as much as US$10 billion from a year earlier. Taiwan Semiconductor Manufacturing Co expects to shell out US$40 billion and Samsung Electronics Co, which spent US$36 billion in 2021, will likely exceed that level this year, according to analysts’ estimates.
Gelsinger said he’s trying to overcome a decade of “bad decisions and poor execution.” But even with a spending spree underway, Intel isn’t keeping up with its fellow chip giants.
Intel’s customer base has undergone a transformation too. The year before Gelsinger left Intel, the chipmaker had the same annual revenue as Apple: about US$37 billion. Intel was about US$5 billion ahead in market capitalization. Since then, Intel has roughly doubled in revenue. But Apple now has a valuation of US$2.8 trillion, annual sales of US$365 billion and a cash position that exceeds Intel’s total market capitalization. Other big buyers of chip buyers -- Amazon.com Inc, Microsoft Corp, Alphabet Inc and Facebook owner Meta Platforms Inc -- also dwarf Intel in size.
Intel is setting ambitious goals, but from “a position of relative weakness,” said Tom Fitzgerald, a fund manager at EdenTree Investment Management. The competition has evolved over the past decade, he said, and so have the customers.
Many of Intel’s biggest customers are designing their own chips. Apple has already abandoned Intel parts in its Mac line of computers, relying instead on technology from Arm Ltd. Amazon and Microsoft are taking similar steps with their server processors.
With that in mind, Gelsinger’s mantra to his design team is to build a better chip.
“We have to create products and technologies that Apple says, ‘Huh, that’s better than I could have done myself,’” he said.
The good news is the proliferation of chips means there will be a bigger pie for the whole industry to carve up. More semiconductors are going into cars, household appliances and buildings -- anything that needs to think for itself and connect to the internet. The Covid-fueled supply crisis of the past year has spotlighted just how reliant the world is on chips.
Semiconductor industry sales topped half a trillion last year, and Gelsinger believes that figure will double within the next decade.
And as Intel makes a wider variety of chips, it looks to become as indispensable as ever.
“It’s going to take awhile, but we’re well on our way,” Gelsinger said.
Photo: Bloomberg
