On Tuesday morning, reports started rolling in that activist investor Daniel Loeb (Trades, Portfolio)'s firm, Third Point LLC, issued a letter to Intel Corp. (INTC, Financial) encouraging the company to explore "strategic alternatives."
Third Point is a New York-based investment firm founded by Loeb in 1995. The activist investor seeks to identify and push situations that will have a positive effect on the stocks that the firm owns, thus creating value for shareholders.
According to CNBC, which viewed a copy of the letter, the points Loeb made to support a change of pace for the company included the following:
"The loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMC's and Samsung's process technology prowess and gain significant market share at Intel's expense."
As for why Loeb is taking an interest in Intel's operations, according to Reuters, Third Point recently took a stake in the company worth approximately $1 billion. However, as this amount is less than 1% of Intel's total market cap of $202.67 billion, we will have to wait for the firm's fourth quarter 13F filing (or any potential interviews or shareholder letters) for more detail regarding the trade.
Intel's struggles
Shares of Intel jumped approximately 5% following news of Loeb's letter to the company, but that still puts the stock down 18% year to date:
One of the reasons why Intel identified as a source of overall underperformance is that demand for the products of its legacy business (such as data center and NSG) is decreasing. Part of this, as Loeb pointed out, can be attributed to the loss of the company's manufacturing leadership position, but another factor is the expected worldwide demand increase for such products as the world shifts to the cloud model.
CEO Bob Swan had the following to say in the company's recent earnings results for the third quarter of fiscal 2020, giving investors insight into Intel's view on this trend:
"Our teams delivered solid third-quarter results that exceeded our expectations despite pandemic-related impacts in significant portions of the business. Nine months into 2020, we're forecasting growth and another record year, even as we manage through massive demand shifts and economic uncertainty. We remain confident in our strategy and the long-term value we'll create as we deliver leadership products and aim to win share in a diversified market fueled by data and the rise of AI, 5G networks and edge computing."
In other words, the plan is to prioritize "new growth" markets related to artificial intelligence (AI), 5G networks, edge computing and so on while slowly divesting parts of the legacy businesses. For example, Intel recently sold its flash-memory, or NAND, business to Korean chipmaker SK Hynix Inc. (XKRX:000660). Other mature U.S. technology companies such as International Business Machines Corp. (IBM) have made similar moves as they attempt to keep profits (and thus share prices) moving up in the long term.
Loeb's advice
"Without immediate change at Intel, we fear that America's access to leading-edge semiconductor supply will erode, forcing the U.S. to rely more heavily on geopolitically unstable East Asia to power everything from PCs to data centers to critical infrastructure and more," went part of Loeb's letter, vaguely hinting about how the trade war between the U.S. and China has negatively affected the semiconductor business.
It seems that Loeb has identified one important way in which some tech giants in the U.S. have unwittingly accelerated their decline. By dumping legacy operations and funneling a higher percentage of their research and development money toward getting a slice of the latest hot tech market, Intel and several of its peers have lost their global leadership edge in legacy businesses, thus speeding up their decline in these segments and allowing more funds to flow to competitors.
Loeb specifically highlighted Advanced Micro Devices (AMD, Financial) and Taiwan Semiconductor Manufacturing (TSM, Financial) as competitors that have recently eaten Intel's lunch. When Intel ended up having to delay its 7-nanometer chips, for example, Advanced Micro Devices was able to sweep in and get a head start with its own competing chips. Taiwan Semiconductor, meanwhile, is the world's largest contract semiconductor company, and its clients include AMD as well as Apple (AAPL, Financial) and Nvidia (NVDA, Financial).
Third Point also reportedly filed with the Federal Trade Commission to acquire incremental shares and preserve the option to recommend board members next year, should the firm "sense a reluctance to work together to address the concerns we have raised in this letter."
Intel issued the following brief statement addressing the letter around midday on Tuesday:
"Intel Corporation welcomes input from all investors regarding enhanced shareholder value. In that spirit, we look forward to engaging with Third Point LLC on their ideas towards that goal."
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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