Subscribe to our newsletter and stay informed
Intel's long-anticipated turnaround appears to be further away than ever after the company's disappointing first-quarter earnings report. The news sent Intel shares tumbling by 9% on Friday, marking their lowest level of the year.
Despite Intel's revenue no longer declining and its continued dominance as the leading maker of processors for PCs and laptops, first-quarter sales fell short of estimates, and the company provided a weak forecast for the second quarter, indicating sluggish demand.
This is particularly challenging for CEO Pat Gelsinger, who is early in his fourth year at the helm.
However, Intel's struggles have deep roots.
Before Gelsinger returned to the company in 2021, Intel, once synonymous with "Silicon Valley," had lost its edge in semiconductor manufacturing to overseas competitors like Taiwan Semiconductor Manufacturing Co. Now, in a high-stakes effort, Intel is spending billions per quarter to regain lost ground.
"Job number one was to accelerate our efforts to close the technology gap that was created by over a decade of underinvestment," Gelsinger told investors on Thursday. He assured them that the company is still on track to catch up by 2026.
Despite Gelsinger's assurances, investors remain skeptical. Intel is the worst-performing tech stock in the S&P 500 this year, down 37%. Meanwhile, chipmaker Nvidia and Super Micro Computer, boosted by surging demand for Nvidia-based artificial intelligence servers, are the index's top performers.
Once the most valuable U.S. chipmaker, Intel is now one-sixteenth the size of Nvidia by market cap. It's also smaller than Qualcomm, Broadcom, Texas Instruments, and AMD. While it was once the largest semiconductor company in the world by sales, it suffered seven straight quarters of revenue declines recently and was surpassed by Nvidia last year.
Gelsinger is betting on a risky business model change. Intel will not only produce its own branded processors but also act as a factory for other chip companies that outsource their manufacturing — including Nvidia, Apple, and Qualcomm. However, the success of this strategy depends on Intel regaining "process leadership," as the company calls it.
Other semiconductor companies are seeking an alternative to TSMC, so they don't have to rely on a single supplier. U.S. political leaders, including President Biden, consider Intel an American chip champion and strategically important for the U.S. processor supply chain.
"Intel is a big, iconic semiconductor company which has been the leader for many years," said Nicholas Brathwaite, managing partner at Celesta Capital, which invests in semiconductor companies. "And I think it’s a company that is worth trying to save, and they have to come back to competitiveness."
But Intel faces an uphill battle.
"I think everyone has been hearing them say the next quarter will be better for two, three years now," said Counterpoint analyst Akshara Bassi.
Intel has faced repeated setbacks. It missed the mobile chip boom when the iPhone was unveiled in 2007 and has been largely sidelined in the AI market, while companies like Meta, Microsoft, and Google order Nvidia chips for their AI needs. Even Apple, which initially considered using Intel chips for the iPhone, ultimately opted for Samsung chips and later developed its own chips.
The rise of Arm-based chips further eroded Intel's dominance. These chips, used in nearly every modern smartphone, consume less power than Intel’s x86 processors, making them more desirable for small devices like smartphones.
Arm-based chips quickly improved due to high manufacturing volumes and industry demands for faster performance and new features. Apple's massive orders with TSMC propelled the company to surpass Intel.
Intel attempted to break into smartphones with its x86-based mobile chip called Atom, but it never gained traction, and the product line was discontinued in 2015.
The company's struggles continued as it missed out on the AI boom. Graphics processor units (GPUs), originally designed for gaming, became essential for running AI algorithms efficiently. Nvidia capitalized on this trend, tripling its sales in the past year.
Intel, lacking a GPU competitor to Nvidia's AI accelerators, developed an AI chip called Gaudi 3. However, it relies on an external foundry for manufacturing.
Despite these challenges, Intel sees an opportunity to regain leadership in AI chip production. The U.S. government is subsidizing a massive Intel fab outside Columbus, Ohio, as part of a $8.5 billion investment in U.S. chipmaking. Gelsinger believes this plant, scheduled to come online in 2028, will offer leading-edge manufacturing and produce AI chips, possibly even for Intel's rivals.
Intel has faced its past failures since Gelsinger took the helm in 2021 and is actively working to catch up to TSMC through a process Intel calls "four nodes in five years."
The journey hasn't been easy. Gelsinger referred to the goal of regaining leadership as a "death march" in 2022. However, Intel remains on track to catch up by 2026. By then, TSMC will be shipping 2nm chips, and Intel plans to start producing its "18A" process, equivalent to 2nm, by 2025.
The company's investments in facilities and tools to produce more advanced chips have led to significant operating losses. However, Intel expects these investments to pay off.
"We have a lot of these investments to catch up flowing through the P&L," Gelsinger said on Thursday. "But basically, what we expect in ’24 is the trough."
While not many companies have officially signed up to use Intel's fabs, the company has already booked $15 billion in contracts with external companies for its foundry services.
Regaining leadership in producing the smallest transistors would benefit Intel and improve the performance of its products. If successful, Intel could indeed reclaim its former status.
"We're rebuilding customer trust," Gelsinger said on Thursday. "They're looking at us now saying 'Oh, Intel is back.'"
