If he had been alive today; witnessing Intel’s fall, its former CEO Andy Grove might have penned a tragic sequel to his “Only the Paranoid Survive” masterpiece; “Success Sickness” to state how his company’s past victories have become a blindfold to future challenges.
Intel’s fall from grace has been coming for a long time. Once a poster boy of innovation, the stock barely meets the return ratios expected by its equity investors these days. Over the past years, Intel stock has under-performed its competitors such as NVIDIA, AMD and even the broader Semiconductor Index (NASDAQ: SOXX).
Intel’s prolonged slump is a result of a perfect storm of challenges and a series of miscalculations by the company. Here are some of them –
- Missed the Semi-Con technology S-Curve in the 1990s: Intel’s early success in the 1990s with PC chipsets (Intel Inside) and its “Wintel” alliance with Microsoft was the reason for its complacency. As a result, the company took its eyes off the then-nascent mobile chipset market. During this time, it also missed the “fabless” revolution in which it could have joined forces with the likes of TSMC whose outsourced foundry model could have ensured that Intel didn’t miss the next evolution of Semiconductor.
- Missed the Industry 4.0 opportunity in the 2000s: Intel decided to approach the Industrie 4.0 opportunity via high-performance computing (HPC). This strategy delayed the company’s entrance into the high-volume Internet of Things (IoT) and edge computing segments. Secondly, Industrie 4.0 is all about building an ecosystem. Even in this area, except for the Plugin alliance, the company’s efforts to cultivate a community have been inconsistent.
- Missed the AI opportunity in mid-2010: By 2010, Intel was already fighting a two-front war; with NVIDIA & AMD as a Fabless designer and with TSMC as a foundry. A decade and a half later, NVIDIA now controls over 70% of the market for AI chips against Intel’s market share of about 1% (Data Source: CNBC).
- Missed developer proximity: Intel’s developer forums make it clear the mood at the Intel R&D centres of late. Intel has suffered tremendous talent loss over the last decade, which has led to many problems, including a delay in innovation.
- Missed the opportunities in Custom Silicon: Intel has been slow to offer competitive alternatives to the growing demand for optimized Silicon used in data centres and mobile devices.
However, not everything is lost for Intel. A large part of its business model is still firing. To start with, over $25 bn in cash the company can do a quick course correction. It continues to offer a wide range of products beyond processors, including network interface cards, memory chips, and other components. The company’s bet on Connected Mobility via Mobileye has been a resounding success, both in terms of revenue and profitability.
Intel presents a complex investment case. Are the company’s historical strength and potential for resurgence sufficient to counteract the current challenges and uncertainties? For an investor, is Intel a promising turnaround opportunity or a hazardous investment in a declining company?
A thousand-dollar bet on a fallen giant?