Intel – Anywhere to Go?

Mr Tan’s options already seem very limited. 

• The recruitment of Lip-Bu Tan as the new CEO of Intel should come with an expectation of a strategic shift that increases the probability of the company being broken up but as this cannot be done for some time, one wonders how the new CEO will do anything that changes Intel’s fortunes.
• Lip-Bu Tan is a well-respected semiconductor executive best known for his excellent stewardship of Cadence and he also currently serves as the chairman of Walden International, a VC firm.
• He also served on the board of Intel between 2022 and 2024 resigning in August 2024 reportedly due to differences in opinion with Pat Gelsinger over the right strategy for Intel.
• I suspect that Mr Tan was not the board’s first choice it is fairly well known that he wanted the position, meaning that the board could have named him shortly after Gelsinger’s exit instead of waiting for over 3 months.
• However, the fact that he is an outsider has played in his favour as the market has marked the shares up 15% in a weak market simply because he is not an insider.
• The problem is that the market will now be expecting large and rapid changes, and it is not at all clear how these will be achieved.
• Intel essentially faces two choices which are to either invest hard and become a leader again or split the company up creating a foundry and a fabless chipmaker.
• Mr Gelsinger’s strategy was to invest heavily and execute to return Intel to the forefront of semiconductor manufacturing.
• Intel’s board appears to have become impatient with this strategy even though the early signs are that Intel is beginning to close the gap to TSMC in some areas.
• Unfortunately, this period of investment has coincided with a difficult period for Intel where its core business is under greater pressure than ever, meaning that there is much less space on the balance sheet for heavy investments than anticipated.
• Consequently, I took Mr Gelsinger’s departure as a reaction to a change of heart by the board over Gelsinger’s plan which it agreed to when he was hired in 2021.
• Lip-Bu Tan was not a board member of Intel at that time but must have given the plan tacit support when he joined in 2022.
• Lip-Bu Tan’s disagreements with Gelsinger and his 2024 resignation from the board are signs that Intel will go in a new direction with Lip-Bu Tan in charge.
• This strongly implies that the intention will now be to split the company into two pieces, but this will not be possible for some time.
• This is because the vast majority of Intel’s fabs are 14nm, 10nm and 7nm all of which use Intel proprietary development tools and not the industry standard tools sold by Synopsis, Cadence and so on.
• Until these fabs are migrated to using the industry standard tools that everyone else uses, these fabs will not be able to make anything for anyone other than Intel.
• This is not likely to happen before 2027 and so spinning the fabs out now into a foundry makes very little sense.
• If a spin-out into a foundry is off the cards and the board no longer likes Gelsinger’s invest-and-return-to-glory strategy, then one is left wondering exactly what strategy Lip-Bu Tan will be changing.
• There are definitely places where improvements can be made such as the bloated headcount and bureaucratic culture, but Intel needs changes of a far more drastic nature.
• Furthermore, Intel’s rivals are not standing still and Nvidia, AMD, Arm, Qualcomm and others are already taking share which will be very difficult to win back.
• Consequently, other than some tidying around the edges, I am wondering what Mr Tan will be able to achieve over the next few years.
• This leaves me sceptical with regard to the 15% rally we have just seen in the share price as I am far from certain what big changes Mr Tan is going to be able to make.
• I have long been an advocate of the idea that when Intel hits 10x 12-month forward PER, it is an attractive opportunity, but for the last few years, the earnings have been falling even harder than the share price.
• With uncertainty surrounding just what Mr Tan is going to be able to do, does not lead me to think that this opportunity is near.