Intel lost 40 billion USD in market value in a single day.
The market reacted brutally when Intel reported disappointing results on August 1. The company's revenue fell 1% year over year, and it posted a net loss of 1.6 billion USD, compared with a profit of 1.5 billion USD in the same period of 2023. Intel CEO Pat Gelsinger said in an email to employees that operating costs were too high and profit margins too low. As a result, Intel decided to cut 15,000 jobs and suspend the dividend it had paid since 1992. Intel's share price has fallen nearly 30% since the results were announced.
Since taking the helm, Gelsinger has worked to return Intel to its former glory, and the US government also wants to revive chip manufacturing in the country. Recent results, however, have highlighted just how far Intel has fallen behind Nvidia and TSMC, and how long it may take Intel to catch up with its industry rivals.
Intel dominated global chipmaking for decades. In the 1990s and early 2000s, the company ruled the personal computer market thanks to its partnership with Microsoft in the "Wintel" alliance. A series of missteps, however, left Intel unable to keep up with the competition. Its heavy focus on PCs caused it to miss the opportunity to develop chips for mobile phones, a booming market. And while many of Intel's rivals moved to a "fabless" model, in which chip designers outsource manufacturing to TSMC, Intel kept making its chips in-house.
In the mid-2010s, repeated manufacturing failures delayed the launch of new processors, leading Intel to steadily lose share to AMD in its core CPU business. Notably, Intel is almost absent from the booming artificial intelligence (AI) chip market, which is now dominated by Nvidia, also the world's most valuable semiconductor company.
Gelsinger understands the situation well. Shortly after becoming CEO in February 2021, he began separating design and manufacturing into two independent businesses. This lets the product division choose whichever foundries best suit its needs, while also allowing Intel's fabs to serve many different kinds of chips. Gelsinger wants Intel's manufacturing business to thrive and outpace its rivals in the chip industry. He has pledged that Intel will become the world's second-largest chipmaker by 2030, behind only TSMC.
With this strategy, Intel is trying to catch up with rivals on two fronts: as a leading designer competing with Nvidia and AMD, and as a chip manufacturer competing with TSMC. The first task looks especially challenging. Intel is lagging in AI chip design. This year, it expects to generate about 500 million USD in revenue from its Gaudi AI chips. By comparison, Nvidia brings in 20 billion USD from AI chips every quarter.
What's more, success in AI chips depends on more than the chips themselves. Nvidia supplies networking equipment to link hundreds or thousands of its processors together. The company also owns CUDA, a software platform that helps customers get the most out of its chips. Having underinvested in AI, Intel is struggling to keep pace.
To grow its chipmaking business, Intel is making a number of major investments. It plans to spend 100 billion USD over the next 5 years building and expanding new and existing plants in the US. To turn its ambitions into reality amid slowing growth, Intel is seeking outside funding and incentives. In August 2022, infrastructure investor Brookfield agreed to cover up to 49% of the cost of building a new 30 billion USD facility in the US. This past June, private equity firm Apollo invested 11 billion USD in a similar stake in Intel's chip plant in Ireland. Intel is also benefiting from 8.5 billion USD in grants and up to 11 billion USD in loans from the US government.
The catch, however, is that revenue from its manufacturing business is still low, and demand for its core products has barely grown. As a result, Intel will need to keep finding new sources of capital or secure even more funding. Both Intel and the US government face a major challenge ahead.
Source: Economist.
