Dan Loeb gives Intel investors reason to hope in 2021

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After a difficult year,

Intel

executives received one final surprise in 2020. It came in the form of a blunt letter last week from activist investor Daniel Loeb.

Loeb, CEO of hedge fund Third Point, outlined the need for change at the once-pioneering chipmaker. And he summed up the question that many Wall Street and Silicon Valley have been asking for over a year now: How has once-dominant Intel (ticker: INTC) so clearly lost its way?

“We can’t imagine how the boards of directors that presided over Intel’s decline could have allowed management to waste the company’s leadership position in the market,” Loeb wrote to the president of Intel, Omar Ishrak. “Stakeholders will no longer tolerate such apparent abdications of duty.”

Intel shares rose 5% on news of Loeb’s letter and a Reuters report that Third Point had a $ 1 billion stake in the company. The stock was still down 17% in 2020, compared to a 51% gain for the PHLX Semiconductor index.

For years, the investment case around Intel has been that its true value lies in a fully integrated approach to chip manufacturing: it designs and manufactures chips, while rivals Advanced Micro Devices (

AMD

) and

Nvidia

(NVDA) rely on third-party manufacturers such as

Semiconductor manufacturing in Taiwan

(TSM) and

Samsung electronics

(005930. Korea).

But this case assumed that Intel could do design as well as manufacturing. Several years of delays have undermined this claim.

“Loss of manufacturing leadership and other missteps have enabled several semiconductor competitors to take advantage of TSMC and

Samsungof

processing technology prowess and gaining significant market share at Intel’s expense, ”Loeb wrote.

As Barron’s observed in November, Intel’s problems may be linked to a decision from 15 years ago, when it chose not to manufacture processors for

Appleof

(AAPL) iPhone. While the mobile market was small at the time, it turned out to be a huge volume for Taiwan Semi and

Samsung,

giving them increased scale and practice to manufacture advanced and energy efficient chips.

Also read:Intel has fallen behind its rivals and the rest of technology. Why his stock may increase again.

The desire to improve energy efficiency is one of the main reasons why Apple decided to design its own Mac chips, which started rolling out to new models in November. Consumers these days are as focused on long battery life as they are on raw performance, and Intel has not been able to keep pace. Taiwan Semi is at least a year ahead of Intel in key chip manufacturing technology.

Intel responded to Loeb’s letter with a statement saying it welcomes contributions from investors on how to improve shareholder value, and that “we look forward to working with Third Point LLC on their ideas to achieve this goal.”

Third Point declined to comment beyond its letter, but the company made it clear where it saw the problem: “Intel’s human capital management problem and the lack of an articulated plan to address it.” Loeb wrote.

In June, top chip designer Jim Keller left Intel for personal reasons. The following month, Intel postponed its next-generation chip until the end of 2022 and announced a reshuffle in its engineering team, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan reorganized the rest of the company’s tech group to account for it.

Swan was not the typical Intel CEO when he was promoted to management in January 2019. He comes from a financial background, having served as the chief financial officer of eBay and a partner at the company. General Atlantic investment.

The lack of technical expertise is even more evident in Intel’s board of directors, which lacks members with chip manufacturing experience. Ishrak, who joined the board in 2017 and became chairman in early 2020, is a longtime medical technology executive. It begs the question how a more chip-focused card could have guided the company in recent years.

I asked Swan about the makeup of the board in an interview in November: “I couldn’t feel better about the diverse makeup of our board representation,” he told me. said, “So we have a different thinking around the table to be able to assess the opportunities and challenges that we face. “

Loeb’s letter was vague on next steps, but the activist noted the possibility of submitting nominees to the board at Intel’s next annual meeting.

Ultimately, Loeb’s interest matches the point we made in our November story: Intel remains a heavyweight in chipmaking with considerable underlying value.

While much of Wall Street would love to see Intel focus exclusively on chip design, it doesn’t have to become a totally factory-less chip operation like AMD. The company has already shown flexibility in outsourcing. In late 2019, an Intel executive said that “something like 20% to 25% of the volume of wafers we buy comes from outside the company.”

More flexibility would help. “Intel could take advantage of TSMC materially (for example for 25% to 50% of its needs) to restore the competitiveness of its chips,” New Street Research analyst Pierre Ferragu wrote last week. “It would also create competition for in-house manufacturing, which can only do good and help mend Intel’s interrupted operations.”

While it’s been a tough year for Intel, the good news is that it won’t take much for executives to give shareholders hope in 2021 – just a willingness to put vanity aside and ask for it. ‘help.

Write to Max A. Cherney at [email protected]