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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (94) 

Intel: A New CEO and Old Problems

The company has to deal with technology missteps, falling market share, lackluster performance on Wall Street and hedge fund activism

Intel Corp. (NASDAQ:INTC) has a new CEO but old problems: technology missteps, falling market share, lackluster performance on Wall Street and hedge fund activism.

Last week, the chipmaker took a radical step in addressing these problems, appointing Pat Gelsinger, an Intel alumnus, as its new CEO after Bob Swan stepped down.

Wall Street cheered the move. Intel stock closed up 4% at $59.25 on Thursday after advancing 7% on Wednesday, following the CEO change announcement. BMO Capital Markets raised its target for the stock to $70 from $50 early Thursday.

Still, Intel's Wall Street performance has lagged far behind competing chipmakers like Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA). The company's shares are up 17% over the last 24-month period, while AMD's shares have gained 337% and Nvidia's shares rose 236%.

Intel also lags behind AMD and Nvidia in a couple of common financial and economic metrics, including average annual total return over the last decade and economic profit, a measure of how effectively a company manages shareholder and debtholder capital.

Company

INTC

AMD

NVDA

Three-year Revenue Growth (%)

9.7

5.1

18.4

Three-year EBITDA Growth (%)

21.5

--

18.5

Current Operating Margin (%)

31.81

13.27

27.17

Average Annual Total Return (2010-2020)

13.97

26.97

37.57

Market Price

$57.58

$88.21

$514.38

GF Intrinsic Value

$61.57

$40.32

$373.47

Economic Profit (ROIC-WACC)%

14.89

25.40

37%

Meanwhile, Intel lags behind Taiwan Semiconductor Manufacturing (TSM) in the chip manufacturing process, still struggling to make chips at 7 nanometers when Taiwan Semiconductor is already manufacturing chips at 5 nanometers. And one of its big customers, Apple (NASDAQ:AAPL), no longer uses its processors in Mac computers.

Intel's leadership change comes amid a turnaround in its traditional business segment and in the emerging cloud-computing segment, which has experienced substantial growth in recent years.

But these efforts weren't sufficient to appease hedge fund activists like Third Point Management's Daniel Loeb (Trades, Portfolio), who called for the company to explore strategic alternatives to enhance shareholder value.

Still, fixing Intel's woes won't be easy for the new leadership team either, which will have to make a hard decision: Choose between sticking with its long tradition of integrating design and manufacturing and keeping them internally (insourcing) or outsource manufacturing as its competitors AMD and Nvidia have been doing.

Insourcing versus outsourcing of manufacturing is an old dilemma many American technology companies have been facing, as they are advantages and disadvantages to each choice. Insourcing helps companies better protect their technological breakthroughs, but it can slow things down while raising costs, giving competitors an edge.

Outsourcing, on the other hand, improves efficiency, cuts costs, speeds up product development and allows companies to focus on their "core competencies." But has its own limitations and "unintended consequences" that, if not addressed, can turn it into a bad business strategy.

Outsourcing is easy to be replicated by the competition; it leads to fragmentation and disintegration of the supply chain, inviting new competitors into the industry. It also nurtures corporate complacency and undermines a company's relations with its labor, customers and the domestic and local communities. Hewlett-Packard (NYSE:HPE) and IBM (NYSE:IBM) are among the American companies that know too well the unintended consequences of outsourcing.

While it's unclear which way Intel's new leadership will go, one thing is clear: They have a tough road ahead.

Disclosure: I don't own shares of Intel.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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