The CHIPS Act Won’t Save Intel. Here’s Why.
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Intel stock has fallen from grace, hitting a 13-year low in share price after reporting earnings on August 1st, 2024. Is INTC stock a buy today? Or is it a value trap? Today we’ll look at Intel’s downfall, what went wrong, and what the company is planning to do going forward. There are some tailwinds for the company, like AI and the CHIPS Act, but there are also plenty of headwinds including divisive DEI policies, expensive construction projects, a rise in competition, and a significant decline in profitability. We wouldn’t touch Intel stock today, but we’ll tell you why, and you can come to your own conclusions.
The world of technology stocks is littered with names that have fallen from grace: IBM, Cisco, BlackBerry. These are firms that are victims of their own success. Today we’re going to discuss one of the most powerful Tech brands in the world – Intel. Is there value to be had in this turnaround story? Is the Chips Act going to save the day? We don’t think so and we’ll tell you why.
Intel’s Valuable Brand
So when you look at this chart here you can see the most valuable brands in the world and in 24th Place is Intel.
Now this brand equity has a certain impact on retail investors who are familiar with the company and will think that because the brand is popular that it might be a good investment.
Intel’s Declining Revenues
And more recently with the decline in revenues over time that you can see here along the top, you see quarterly revenues, so some cyclicality to be observed there.
But notice that recent decline and we’ve pulled that out in the chart below there on the left that shows Intel’s quarterly revenues slipping and, of course, that translates into annual revenues that have now started falling quite dramatically.
And I pulled this from their 2021 deck, they say best year ever. That was their last best year, oh let’s hope it wasn’t their last.
You see here consistently growing Revenue. So that’s good, that’s what we’re looking for. And they had the highest fiscal year Revenue ever, you see all these records and things were going quite good. Notice those gross margins, so in 2021, nearing 58%. Well, today, that’s a different story.
And I pulled out this slide from the next year’s deck which shows Data Center and AI group (DCAI) Revenue down 33%.
So that’s just two years ago, with all the AI hype and boom. This is not what you want to see for your data center and AI segment. And look at when they talk about Revenue, they say, “lower revenue on TAM contraction.” Well, that Total Addressable Market doesn’t seem to be contracting from where NVIDIA sits. And competitive pressure, well, speak of the devil. And, of course, when revenues fall, you can expect profits to fall as well, rather dramatically there.
Leadership Transistions at Intel
So what’s interesting to note about the Intel turnaround story is the progression of leadership.
So in 2015, it’s worth noting that the old CEO announced a $300 million initiative to move away from meritocracy and that’s rather unfortunate because it damages shareholders, customers, and especially the people that it purports to protect. Well, three years later he was canned for playing grab ass, and then the CFO became the new CEO a year after that. Two years later, he was replaced by the old CTO, Pat Gelsinger. So I just pulled this out of Intel’s news fact sheet on their Diversity and Technology initiative.
Here I just wanted to note their diversity technology initiative and where they’re setting quotas. That’s a really bad idea and here they talk about retaining diverse employees at a rate higher than the rest of the population. So what’s up with that and one wonders if that’s still in effect 5 years later as Intel moves to cut thousands of jobs to reduce costs and to fund their rebound.
And this article by Bloomberg talks about how Intel is coming to grips with uneven demand for chips that run laptops and desktop computers, its main business, and how Gelsinger plans to build factories to manufacture semiconductors for other chip makers – The Foundry plan -we’re going to talk about that.
And they’re expected this year, it says, “growth will pick up modestly in the second half of this year, total sales will increase 3%.” That would be the first annual revenue increase since 2021. So some green shoots of hope.
Can AI Save Intel?
And this article by Wire talks about the commitment that the CEO says he’s making to Foundry, says, “I’m committing tens of billions of dollars of Intel Revenue to 18a.”
So that’s their latest manufacturing process. He says, “My life depends on making this work.” And he gave their head of Technology development a blank check, we’re going to talk about that. And he refers here on this “death march to get back to leadership.” Very dramatic language, very dramatic goals.
And he says, “We see light at the end of the tunnel.” Well, perhaps. But maybe not as bright a picture as he’s painting. So Intel plans to become the world’s second largest Foundry by 2030.
Here you can see the 10 largest foundries and, look, Intel’s nowhere to be seen. And they plan to surpass Samsung with all the money they’re investing. And many are expecting the Chips Act to make that possible. Well, that may not be the case.
Intel and the CHIPS Act
And this piece by McKinsey talks about the Chips Act of 2022, so that’s several years ago. It’s going to direct $280 billion in spending over the next 10 years with the bulk for scientific R&D.
So the US makes up only 12% of the world’s chips. But there was quite a steep decline from the 90s when it produced 37%. So some of the more critical and profitable advanced design foundries in Asia produce over 90% of these advanced chips. So you can see here where this money is going. And around $50 billion is expected to invest in expanding domestic manufacturing of mature and advanced semiconductors. And IndustryWeek here makes a good point.
They say, “the Chips Act funding is going to the nation’s largest chip companies.” The same companies that lost their Competitive Edge to Taiwan Semiconductor and Samsung in the first place. So those are the number one and number two foundries. TSMC absolutely dominating. And what’s interesting is, you see, they’re getting some grants here.
So TSMC per this Bloomberg piece gets nearly $12 billion in US grants, loans for chip plants. I suppose that works at the idea is to manufacture chips in the United States and geography is what matters then this is certainly leading to some progress in that respect.
One thing to note about the Chips Act, and I think that this piece by Strive, they’re a firm we’ve covered before, an asset management firm. They say, “their stated goal is that the purpose of a for-profit corporation is to maximize long-run value to investors.” Couldn’t agree more. It’s odd that has to be even said.
But they’ve stated here that chips and Science Act money has been sluggish (there’s no doubt about that) and they say it’s so loaded with DEI pork that it can’t move.
So certainly as part of their business model, you know, it makes sense to point out the deficiencies here. But I think that the takeaway here is that they say the world’s best chipmakers are tired of being pawns in the Chips Act’s political games and that a bipartisan group of lawmakers is already trying to pass a bill exempting chips funding from the multi-year environmental review required by the National Environmental Policy Act.
They say the same “Need for Speed” calls for adding in a veto of the Commerce Department’s diversity tag-alongs. Meaning that this Chips Act isn’t as simple as it says on the tin. So the government is making companies jump through hoops. Well, how can we tell that’s, in fact, the case?
Well, you look at some recent pieces earlier this year and late last year from The Wall Street Journal on how chip projects are facing delays, Intel’s delaying their projects citing slow chip market, US government’s sluggish Chips Act payout slam the brakes on Samsung’s Fab, Company delays mass production at Texas Fab to await further chips funding.
So you see here Taiwan Semiconductor and Samsung are benefiting from the- or not- as it were from the same act that Intel hopes will propel them ahead of Samsung in second place when it comes to being a leading Foundry. But it’s not quite working out.
Intel’s New Chip Fabs
You see this piece from The Register, Intel’s effort to build a Foundry business costing far more and taking longer than expected.
They say if you want to make money, you got to spend money. And against, Samsung, it’s going to cost a lot. Indeed Intel has committed to more than $185 billion in spending across new and existing Fab packaging and test sites and they’re going to grab up to $8.5 billion in direct funding and up to $11 billion in loans from the US government.
That’s not very much when you consider their total spend. And there are cost overruns, you see here they say Arizona Fabs were projected to cost about $10 billion a piece.
But a little over a year later, the actual cost would be closer to $30 billion. Similar story with Ohio Fabs, slated to cost roughly 10 billion a pop, however as of earlier this year, the estimate is closer to $28 billion plus Staffing problems abound, and you throw in DEI requirements into that.
Good luck hiring competent people that can get things done. You don’t put restrictions on hiring managers otherwise they’re not going to be able to accelerate their Staffing as needed to bring these factories online. They say here, Intel’s Mass Market 18a process node on which much of Gelsinger’s Foundry bet hinges won’t see broad adoption until at least 2026.
So we’re a couple years away from seeing whether or not this is going to work as we hope. And there’s a bit of a “build and they will come.” This is Intel’s new Fab 9 in New Mexico in January of this year and it just goes to show you how much money is being invested into this Foundry plan. And as a result, they’ve broken up their segments slightly differently.
Intel’s Business Segments
So we have three buckets here: Intel Products, Intel Foundry, and Other which include, of course, their spun- out Mobileye.
Under Intel Products, you have Client Computing group, what Intel is traditionally known for, Data Center and AI, something that doesn’t seem to be growing as fast as it should, and Network and Edge.
When we look at the last five quarters, this was taken from their last deck, I know they have earnings coming up but it’s always good to look at a company before all that earnings noise and see what’s going on, you don’t see much growth here. You certainly see mention of AI in each bucket but where’s the growth especially in that segment in the center, Data Center and AI? They just aren’t seeing the growth that they should and there isn’t that much profitability either.
And what’s interesting is when you look at Foundry and Intel products, right, these are those two buckets, well, if we add these up, we have $4.4 billion in revenues last quarter from Intel Foundry and around $12 billion in revenues from Intel products, add those up we get $16.3 billion. Well, why were their total revenues 12.7 billion?
Well, what you can do here is go down that deck and you see here something called inter-segment eliminations. So even though these segments are generating a certain amount of Revenue, they have internal customers.
What’s actually happening here is that Intel is Intel Foundry’s biggest customer. So until they start selling more externally, presumably as they continue bringing more factories online – more foundries online – then they aren’t really seeing that benefit yet.
Intel’s Profitability Problem
But one thing I noted that’s a bit of a problem is profitability. Three charts here to note.
So one on top, Revenue, Gross Profits, below that of course these two are quite correlated, but look at Gross Margin on the bottom there, look at how it’s- it was riding above 60%, right around 60%, until 2018, it slowly started declining and look at that massive drop off in 2022 that coincides with revenues dropping.
What they’re telling us is to expect 60% gross margins in 2030. So 6 years from now when all this investment is bearing fruit, we’re expected to see these 60% gross margins. It sounds great but that’s- they’re just simply getting back to where they were.
That’s not some grand accomplishment, that you’re simply playing catchup. When you look at their operating margins, it’s a similar story, perhaps worse. Look here, so you see that Revenue drop on the top there, below that you see operating income? Look at how that’s gone negative.
And when you look at their cash flows, you can see just how much cash they’re burning. That recent announcement of reducing headcount is all about trying to save money that they can pour into this $185 billion commitment. And along the bottom there, look at the operating margins.
They want to achieve 40% operating margins in 2030, I didn’t see where they’ve ever done that historically. So at least they have a goal that exceeds something they’ve never done. But seems like to start, they need to get back to where they were before.
Intel Dividend Cut
So some people might see Intel as a value stock and you need to be careful there. So the first thing to note here is their dividend cut and Morning Star says here, Intel, whose trailing 12-month yield approached 6% at the time of the cut, which you see above 40, what, nearly 50%, 40% drop from where it was in 2022 to 2023 illustrates a key risk for dividend investors. High yielders can be troubled companies with unsustainable payouts.
Indeed, the old value trap is a great example of that. And when you talk about value versus growth, we throw around those terms a lot, it’s worth noting this chart here, this set of bullets from MSCI’s methodology on how they allocate companies to value or growth.
And you see dividend yield is a big component of a value company and that’s certainly fallen off a cliff for Intel. And when you look at growth, of course, earnings per share growth is what makes a growth company. So based on Intel’s stated goals, they hope to get back to being a growth company but we don’t invest in turnaround stories.
Conclusion
Our Tech investing methodology calls for investing in leaders and when leaders lose their way, they become turnaround stories and that’s not a good thing.
Intel may not benefit a whole lot from the Chips Act just based on what we looked at especially when you consider their key competitors that they’re trying to beat are also benefiting from the same Act.
If everything goes well, Intel will have caught up to where they should have been a long time ago. It’s probably a great Harvard Business School case study to talk about how that ever happened in the first place. Maybe because it was paying attention to [ __ ] initiatives like DEI which do nothing but damage everything they touch.
There’s a lot better ways of investing in semis than Intel. You have the ASML Monopoly is interesting, we’ve covered that before in a previous piece. You have Synopsis which we really like as a software play, and they benefit regardless of who comes out ahead. And, of course, there’s Taiwan Semiconductor, they’re a Foundry leader already.
And if you’d like to learn more about that company, then I’ve put up a video here that you might like. Please give that a watch. Check out our premium subscription in the comments section. Thanks so much for taking the time to watch this today.
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