Intel (INTC) is in the midst of one of the most tumultuous periods in its 56-year history. Declining sales, missed opportunities to compete in AI and a massive turnaround by CEO Pat Gelsinger who wants to restore the company to its former glory are putting significant pressure on the chip giant’s earnings and share price.
And things for the company are only getting more interesting.
Last Monday, Intel announced it has signed an agreement with Amazon (AMZN) to build custom chips for Amazon Web Services, a positive sign for the company’s nascent third-party foundry business.
Then the Wall Street Journal reported on Friday that Qualcomm (QCOM) had reached out to Intel about a successful acquisition deal that would give Qualcomm a bigger foothold in the PC and AI space. That’s not all. On Sunday, Bloomberg reported that Apollo Global Management (APO) has offered to make a multibillion-dollar investment in Intel to help fuel Gelsinger’s turnaround. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
There’s a lot to follow and even more to make sense of. Luckily, I’m here to help solve everything for you.
Intel is dealing with declining sales and the unenviable position of having to compete with market leader Nvidia in AI. For 2023, Intel reported annual revenue of $54.2 billion, down 14% year-over-year from the $63.1 billion the company saw in 2022.
That included an 8% decline in Intel’s Client Computing Group, which sells chips for PCs; a 20% decline in data center and AI revenues; and a 31% decline in network and edge sales. However, Intel did report a 103% increase in its Intel Foundry Services, but it was only $952 million.
Intel CEO Pat Gelsinger speaks at the COMPUTEX forum in Taipei, Taiwan, June 4, 2024. (REUTERS/Ann Wang/File Photo) ·Reuters/Reuters
Part of Intel’s troubles stem from the fact that the explosion in PC sales at the start of the pandemic pulled Client Computing Group’s revenues forward by several quarters, creating a boom and bust. Consumers bought new computers en masse for work and play, causing chip revenues to soar. But millions of consumers usually don’t buy a new PC at the same time. Because so many people had new computers, there were fewer consumers looking for upgrades, and sales entered a prolonged slump, causing shipments to plummet for eight quarters in a row.
However, sales are picking up again. In July, IDC said the PC market grew 3% in the second quarter, marking the second consecutive quarter of growth. But the sector still has a way to go.
At the same time, Intel is facing a new threat from Qualcomm, which earlier this year began offering its Snapdragon X Elite and X Plus chips in Windows PCs as an alternative to Intel’s processors. These chips offer improved performance and power compared to Intel’s older offerings and are intended to compete with Apple’s (AAPL) exceptional M family of chips that power its MacBooks.
However, Intel is fighting back. Earlier this month, the company showed off its Core Ultra 200V line of processors that it says can outperform Qualcomm’s chips.
Declining PC sales also affected graphics giant Nvidia ( NVDA ), which saw sales of its video game graphics chips deteriorate after the pandemic. But the company, unlike Intel, has managed to leverage its early investments in AI to capitalize on the surge of interest generated by the debut of OpenAI’s ChatGPT in November 2022.
That helped catapult Nvidia to the forefront of the semiconductor industry and propelled its shares to extraordinary new heights, rising more than 860% in the past two years and 191% in the past twelve months.
Intel is trying to catch Nvidia with its own Gaudi line of AI accelerators. On Tuesday, the company debuted its latest Gaudi 3 AI accelerator and announced that IBM will use it as part of its IBM Cloud offering.
But with Gartner estimating that Nvidia has more than 70% of AI chip sales, it’s going to be an uphill battle.
Intel is also vying for a position as a chip manufacturer for third-party customers. The plan is for the company’s foundry operations to operate as a subsidiary of Intel, which builds processors for customers looking for an alternative to TSMC, one of the world’s largest chipmakers.
But the buildout is expensive and Wall Street isn’t completely sold on the idea. Analysts at Citi Research have said Intel should exit the foundry business altogether so it can improve margins and earnings per share.
However, in September, Intel announced a multibillion-dollar deal to “produce an AI fabric chip for AWS on Intel 18A, the company’s most advanced process node.” The company will also build a customized version of its Xeon 6 chip for Amazon.
The news comes after Intel announced that Microsoft had signed on as a manufacturing customer in February. Two big companies are certainly a start for Intel, but it will need to win a slew of customers if it wants to grow its manufacturing segment so it can compete with rival chip makers.
Intel’s PC and AI problems have made it a potential takeover target, and that’s where Qualcomm and Apollo come into the mix. Qualcomm wants to buy Intel, according to the Wall Street Journal, although it is unclear whether the company will fully retain Intel or sell parts of its business segments. The deal is also sure to raise many antitrust concerns, as the companies are two of the most important chip companies in the US.
Apollo, meanwhile, appears to be backing Gelsinger’s plans and could invest up to $5 billion in Intel to continue the effort, Bloomberg reports.
Now investors will have to wait and see whether Intel moves forward with either company or continues to try to go it alone.
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Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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