Why Intel Stock rose, then collapsed last week after its new CEO spoke to investors

A rejuvenated Intel (NASDAQ: INTC) had two interesting days Thursday and Friday of last week. The company released better-than-expected fourth quarter 2020 results Thursday morning, which initially sent stocks soaring by around 7%. This was after the stock had already risen by around 15% since the month following the involvement of activist investors and the appointment of new CEO Pat Gelsinger.

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However, after the conference call held Thursday night, Intel’s stock plunged more than 9% the next day. Apparently, investors were disappointed that Gelsinger and current management didn’t announce any drastic changes to Intel’s manufacturing plans. Considering the recent rise in the stock, it may not be surprising that the anti-climate conference call caused a sell-off.

However, the point is that Gelsinger’s initial strategy, while disappointing to some hoping for more radical action, is exactly what Intel needs for long-term success.

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Why Gelsinger’s comments may have disappointed some

Investors chasing Intel might have hoped its new CEO would announce more outsourcing of its manufacturing to Semiconductor manufacturing in Taiwan (NYSE: TSM). Such a move would likely improve Intel’s competitiveness in the short term, as Taiwan Semiconductor has already successfully started producing 5nm chips. Meanwhile, Intel’s struggles have placed it well behind TSMC, and Intel now expects its 7nm chips (equivalent to TSMC’s 5nm) to be released by the first half of 2023. By Therefore, short-term investors were hopeful that Intel could stop trying to run its own factories. and simply become a chip designer, with outside foundries like TSMC taking on the heavy manufacturing load.

However, that move doesn’t appear to be in the cards. Gelsinger reiterated that Intel could move some products to outside foundries (such as its new GPUs), but the “majority of 2023 products” – probably referring to 7nm processors – would still be made in-house.

So came the quick sell-off from investors hoping for a change in strategy. Instead, Gelsinger takes the more difficult route; one that will take several years to pay … if it pays off at all.

Yet the hardest path is the right long-term decision, even if it will be harder to make. Here’s why.

Outsourcing would rob Intel of its traditional competitive advantages

While outsourcing to TSM would be a quick fix to Intel’s problems, it would also remove the prospect of ever regaining the technological leadership that has made Intel the dominant force in the semiconductor industry. If Intel moves to outside foundries, it could only match the node transitions of its competitors, not overtake them.

While Intel’s manufacturing difficulties caused it to lose market share in favor of the ascendant Advanced micro-systems (NASDAQ: AMD), Intel still has the largest market share today, especially in data centers, as it started out from a 90% and more dominant position. However, its share has significantly decreased in desktop processors.

If Intel outsourced, it could stem the decline in the short term, but in the long run, it would likely only allow Intel to maintain equal market share with AMD and other potential competitors.

Intel has fallen behind in the past and corrected itself

One of the more encouraging comments from the conference call was when Gelsinger pointed out another time that Intel fell behind its competition, when processors switched to multi-core technology in the mid-2000s, to catch up and finally surpass them:

I was very involved in the period when we were very well downsized in the market and behind the multicore. And during this period from 2005 to 2009, we have transformed the company and unquestionably established the leadership position after a period when many questioned the ability of the company to succeed, again large companies are capable. to come back from periods. of difficulty in the challenge and they come back stronger, better and more capable than ever. And I believe this is the opportunity at Intel and I am convinced that this company has its best days ahead of it …

Of course, producing advanced node semiconductors seems like a tall order, as Intel struggled and lost ground not only during the 7nm transition, but also the previous 10nm transition before it. Still, Gelsinger seems convinced he can affect a turnaround under his leadership.

Intel is an important national asset

Another point is that Intel is the only major US processor company that runs its own factories, other chip designers outsourcing to Taiwan or Samsung in Korea (OTC: SSNLF). Yet with the trade war and other supply chain issues this year, there is now a new impetus to reinvest in semiconductor manufacturing in the United States. While TSM is building one of its new factories in the United States, and Samsung may also build another factory on American soil, it probably wouldn’t be a good idea for all chips made in the United States to depend on foreign companies. .

By retaining its manufacturing plants, Intel would not only maintain U.S. capacity, but could also benefit from potential new incentives under the Biden administration. There is currently a $ 50 billion proposal in Washington to invest in domestic semiconductor manufacturing, so if Intel wants to get any of these federal tax breaks or subsidies, it probably can’t outsource its factories. to foreign companies.

Gelsigner brings new blood

Finally, if Intel is to take back the manufacturing throne in the future, it will have to attract the best minds in engineering to do so. This is why Gelsinger’s selection was so important in the first place. Gelsinger had previously spent 30 years at Intel and is a technologist at heart, having trained under Intel legends Andy Grove, Gordon Moore and Robert Noyce.

After former CEO Brian Krzanich stepped down following an affair with an Intel employee in mid-2018, former CFO Bob Swan took over as CEO. While it probably wasn’t fair to blame Swan for Intel’s manufacturing issues, as they likely started before he became CEO, Intel likely needed a leader with deep roots in technology, rather than in finance, to get the company out of the quagmire.

On the conference call, Gelsigner reiterated that returning to Intel as CEO was his “dream job” and that he was truly delighted to bring in his own select team. Gelsinger said: “You may have seen that we just announced the return of a new member, one of my absolute favorites when I was here. Glenn Hinton returning to the company, and you will see d ‘other announcements from key executives come back. ”

Management seems confident

If Intel investors want the company to become a technology leader again, and not just an undifferentiated competitor, Gelsinger’s strategy is absolutely the right approach. Encouragingly, Gelsigner also said that, based on his preliminary review of Intel’s new 7nm design – which dates from around six months after the initial misstep – he is confident he’s on the right track. .

Only time will tell. An investment in Intel is ultimately a gamble on the ability of Gelsinger and current management to solve a difficult manufacturing problem. If successful, Intel could have a huge advantage, given its modest valuation. But stock still carries this big execution risk, so Intel will likely be an ongoing battleground stock over the next couple of years.