Should you buy Intel on the participation of recent activist investors?

Despite a general boom in tech stocks this year, one big notable exception was Intel (NASDAQ: INTC). Long known as the dominant player in the field of computer processors, “Chipzilla” saw its gap against rivals deteriorate further this year due to internal technology issues, and the stock responded by dropping 14.7. % in 2020, including dividends. This is a huge underperformance compared to the semiconductor sector, which gained 55.5% last year.

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Intel’s underperformance and discounted valuation of just 9.75 times earnings recently prompted activist investor Dan Loeb to invest around $ 1 billion in Chipzilla, after which Loeb sent a scathing letter to the president of Chipzilla. ‘Intel, demanding big changes.

Yet while Intel’s stock has surged in the news, I would still advise staying away from Intel for the time being for the following reasons.

What Loeb said

Reading Loeb’s letter to the president of Intel, there doesn’t seem to be any news. Basically, Loeb just lambasted Intel for losing its manufacturing advantage over the past seven years, while offering no real solutions except to “retain a reputable investment advisor to assess strategic alternatives, including whether Intel should remain an integrated device maker and the potential divestment of some failed acquisitions. ”

Yes, Loeb’s argument that top management was hugely overpaid while the company fell behind in manufacturing is probably correct, so significant savings could be made. However, just pointing out the obviousness of Loeb won’t help Intel’s action. In addition, Intel is already considering outsourcing some of its manufacturing to outside factories. Meanwhile, completely divesting its own manufacturing could save the company in the short term, in which case Loeb could simply sell its shares, while damaging Intel’s competitiveness in the long term.

Stuck between a rock and a hard place

Not so long ago, Intel was the envy of the chip world and steadily outperformed its competitors in the production of advanced processors. However, more and more industry moved to a “factory-less” model, in which companies would only design chips and outsource complex and expensive manufacturing tasks to other foundries. It allowed Semiconductor manufacturing in Taiwan (NYSE: TSM), the largest outsourced foundry by volume, to gain manufacturing expertise and get a head start on Intel, reaching 7nm production before Intel can hit its 10nm chips – which, for whatever reason, are equivalent to the 7 nm TSM.

Taiwan Semi already produces 5nm chips, while this summer Intel revealed a further delay of its equivalent 7nm chips until 2022 or 2023. That would put Intel several years behind, and in a precarious position indeed.

In other words, part of what made Intel great now is its biggest responsibility. Therefore, society is between a difficult and a difficult place. If it cedes its factories and becomes factoryless, it could then catch up with its rivals in terms of chip density; however, Intel would then sacrifice the highly differentiated advantage that gave it an initial advantage.

“Divestment” appears to be a short-term solution to a long-standing problem

Loeb’s other argument is that Intel should consider “potential divestment of some failed acquisitions.” Loeb likely has his eye on the Altera unit, which makes on-site programmable door arrays, or custom chips, or Mobileye, the autonomous driving software unit.

And yet, if Intel was so wrong to buy Altera in late 2015, why did the processor compete? Advanced micro-systems (NASDAQ: AMD) just buy Altera rival and other FPGA maker Xilinx? Obviously, there seems to be some benefit in being able to offer both processors and FPGAs under one roof and coordinate system-on-chip designs with both types of processors.

Meanwhile, Intel has already divested non-core assets, recently selling its NAND Flash business to SK Hynix and also sells its $ 314 million stake in the Big Data platform Cloudera in the last few months only.

So it looks like Intel is already doing some of what Loeb suggests. That being said, divesting everything except processors seems like a hatchet when a scalpel is probably the best.

What Intel needs

Here’s what Intel should do: fix what it missed and start producing the world’s best cutting-edge chips again. This will likely require new leadership, or at least a new culture that will make top tech talent want to work for Intel rather than its rivals. I agree with former Cypress Semiconductor founder TJ Rodgers, who recently called for such a change at Intel on CNBC.

Intel may have to use outsourced factories in the meantime to catch up with its rivals, but a massive abandonment of its strategic assets won’t really make it more competitive in today’s ultra-competitive tech industry.

Of course, this fix won’t be easy and won’t happen overnight. It certainly won’t happen if the business starts selling parts of itself. Meanwhile, Intel appears to continue to lose market share in laptop and cloud processors over the next year and more as it works to turn things around. Meanwhile, its stock price will likely remain depressed.

Which is why I would stay away from this seemingly cheap title until new leadership kicks in or new direction is more clearly defined.