Amid the semiconductor shortage over the past couple of years, the sales of most major chipmakers skyrocketed, with Gartner estimating a 25.1% jump in global semiconductor revenue in 2021.
However, there was one notable exception. Leading semiconductor pioneer Intel Corp. (INTC, Financial) was dethroned by Samsung (XKRX:005930, Financial) as the world’s leading chipmaker by revenue, while Advanced Micro Devices (AMD, Financial), Nvidia (NVDA, Financial) and the Arm collective continued eating away at its compute market share. In 2021, Intel’s revenue grew only 1% compared to the prior year.
With demand for semiconductors continuing to outpace supply, Intel is grasping at the lifeline of support from the U.S. government in a bid to re-establish its foundry operations and take back its former undisputed market dominance.
Those who have faith in the company’s ability turn itself around may believe the stock is a steal right now at a price-earnings ratio of just 6.10. Even if Intel can return to growth, though, that path will be an expensive one, and the company’s once in a lifetime monopoly is not coming back, which could have long-lasting effects on the stock’s valuation.
How Intel lost its top spot
From 2010 to 2018, Intel had a monopoly on processors throughout the PC universe, an incredibly lucrative position to be in. However, just three years later, it ended up drastically underperforming the semiconductor sector as a whole during a significant boom in demand. How did this happen?
In short, Intel lost its top spot in the semiconductor industry by taking it for granted. The nature of monopolies is that companies in this position tend to rest on their laurels. They lose their drive to outperform because, in the short term, they can rake in easy profits with little effort. Intel turned out to be no exception to this rule.
As tech reviewers have been chronicling for the past few years, Intel has increasingly been falling behind competitors in the consumer-focused market. It kept its CPU dominance for a bit longer, but amid repeated delays in many of its next-gen designs, Intel recently began to lag in the CPU market as well. For example, when AMD released its Epyc 7742, it soundly beat Intel’s Intel Xeon Platinum 8280.
Even as Intel has fallen behind on some aspects of compute, it has remained superior in others, but in terms of overall performance, many prefer AMD instead, especially since AMD’s prices are often lower.
Arm processors are generally slower and less powerful than Intel processors, but they are more mobile-friendly and energy-efficient, as they use reduced instruction set computer (RISC) rather than the complex instruction set computer (CISC) that Intel and AMD use.
Apple (AAPL) also ended its 15-year partnership with Intel in 2021, replacing Intel's chips with its own M1 chips.
By the time Intel realized it needed to do more to keep its monopoly position secure, it was too late.
Now Intel is the one playing catch-up
Unfortunately for Intel, now that the competition has caught up, it is too much to hope that it will just go away. When Intel was the undisputed leader in compute, it had the advantage of a head start, but that head start is gone now.
These days, in addition to playing catch-up on the CPU front, Intel is entering new markets such as GPU to compete with Nvidia (NVDA, Financial). It is also trying to re-enter the foundry business after previously abandoning it to outsource chip production overseas and reduce costs.
While these are moves in the right direction, going from a monopoly to playing catch-up is not a positive sign. If Intel’s growth remains lower than the semiconductor industry as a whole even as it invests enormous amounts of capital to bring about a turnaround, potentially squeezing margins in the process due to re-entering the foundry business, I do not see investors flocking to the stock anytime soon.
The turnaround will be expensive
This brings us to the topic of what Intel’s turnaround efforts will cost. Intel’s problems are not unfixable, but as evidenced by the company asking the government for handouts on the grounds of patriotism and bringing semiconductor production back to the U.S., it would likely have trouble funding a turnaround just with its own capital.
Intel is even reportedly looking into private equity and hedge fund options to fund innovations in its compute business and revitalize its foundry business.
This is not the strategy of a company that one would expect to be minting money in just a few short months or years. This is a long overdue refocusing on the long term. Only time will tell whether the expensive investments necessary to revive Intel’s growth will have a lasting impact on shareholder value.
Takeaway
Right now, Intel is losing market share even as the semiconductor industry grows, which has put an understandable dent in its valuation multiples. Investors are proceeding with caution because it is unclear how well the company’s turnaround efforts will pay off. Some see a prime value opportunity at hand and are willing to risk short-term declines for potential long-term gains.
For my part, I think the chances are good that Intel can remain competitive in compute. I think it can also get its foundry business up and running, especially with government assistance and a revival of interest in patriotism-focused corporate practices.
However, unless AMD, Nvidia and the Arm collective suddenly decide to halt their research and development and fall behind Intel, competition in compute will remain fierce. On the foundry side, Intel is facing off against the Mount Everest of chip foundries, Taiwan Semiconductor Manufacturing Co. (TSM, Financial).
Intel is undervalued for good reasons, and it has yet to provide any definitive signs that a turnaround is around the corner. Going forward, we can likely expect continued lackluster earnings results and valuation multiples as the company invests heavily in its business while being outpaced by competitors in terms of growth.
