Please ensure Javascript is enabled for purposes of website accessibility

Investing in the Intel Turnaround? Don't Be Too Quick to Draw Comparisons With AMD

By Nicholas Rossolillo - Jun 16, 2021 at 6:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Intel is not in the same position as AMD was over a decade ago.

The world's largest semiconductor company (as measured by revenue), Intel (INTC -0.76%), has not been having a good go of it as of late. The company has fallen behind technologically to leading chip fabrication behemoth Taiwan Semiconductor (TSM 1.53%), and myriad other chip designers like NVIDIA (NVDA -1.18%) have been scooping up sales from Intel's dominant PC and data center biz.

Intel has a plan to invest heavily in its fabrication process and revamp its product designs, though, and some investors have drawn parallels between Intel now and where scrappy general purpose chip company AMD (AMD -1.54%) was in the years following the Great Recession of 2008-2009.  

I'm not so sure it's a good comparison. Intel of 2021 is nothing like AMD of the early 2010s. Intel may indeed be a long-term value trading at just 12.5 times trailing-12-month free cash flow as of this writing. But don't expect a massive resurgence like AMD experienced -- one that has sent AMD stock soaring 950% over the last 10-year stretch. Intel has serious issues that won't be solved by a simple "turnaround story." Here are two simple reasons why.  

Someone in a lab suit holding a semiconductor.

Image source: Getty Images.

Intel isn't called "chipzilla" for nothing

First consider the fact that a turnaround story for Intel would simply mean it gets to hold on to its leadership in market share of the global chip industry. With nearly $78 billion in total revenue over the last year, Intel alone accounts for nearly 20% of global spending on semiconductors.  

In stark contrast, AMD was a tiny player in the industry in 2012, when it started getting aggressive with its restructuring plan (it spun off GlobalFoundries as a separate entity that year, but more on that in a moment). Nearly a decade ago, global semiconductor spend was sitting at about $300 billion a year, and AMD hauled in just $5.4 billion in sales that year (less than 2% global market share) to Intel's $53 billion (about 18% market share, close to the same as today).

The point here is that AMD wasn't just trying to find its way again. It also had a lot to gain at the expense of some much bigger rivals when it embarked on its makeover. Intel is (and has been for a long time) the global chip leader. While the semiconductor industry is still a growth trend, Intel has the most to lose -- not the most to gain from getting itself back on track. And right now its business is stagnating while peers like AMD, NVIDIA, and others grow at a double-digit percentage clip. This is a very different situation than what faced AMD 10 years ago.

No drastic action to simplify its operations

Today, AMD's sales have grown to about 3% share of global spend -- and this is without the help of its former fabrication business GlobalFoundries (GloFo) that it spun off in 2012. You see, as part of AMD's rebound, it decided to narrow its research and development focus only to chip design, then contract actual manufacturing out to GloFo and other firms (like the aforementioned Taiwan Semiconductor). The simplification strategy worked, and AMD's product suite is now taking lunch from Intel. 

To date, Intel plans to make a comeback by doubling down on its manufacturing business, and tapping other foundries to manufacture some of its own designs. Additionally, it might license out its chip architecture to other designers, a licensing strategy employed by ARM (which is in the regulatory review process before being acquired by NVIDIA) that has turned licensees like Apple (AAPL -0.14%) and Alphabet's (GOOGL -0.61%) (GOOG -0.55%) Google into chip engineers too. Put simply, the semiconductor landscape is changing, and Intel has no focus. Sounds like a complicated mess to me.

Intel has said it will be investing $20 billion to construct some new fabrication lines. Sounds like a bold move, but this kind of construction takes years to complete. In the meantime, other outfits (again, Taiwan Semiconductor) have already been in the process of upgrading their manufacturing tech all along. Intel won't be able to just simply throw money at this problem to get a quick fix. Catching up on the technology curve is no small task, and more drastic action (like AMD shrinking in 2012 with the longer-term goal of becoming a bigger chip designer) is often needed to pull it off.

The positive spin here is that Intel has deep pockets and spends tens of billions of dollars every year on new research and development. Who knows what kind of tricks it might be able to pull out of its wide-brimmed hat? However, this is a very large ship, and getting it to turn won't be nearly as easy as it was to turn AMD around a decade ago. Since it's already the world's largest chip company by sales and has dozens of smaller peers nipping at its heels, I think there are far better places to invest money for the long term in the semiconductor industry than a possible Intel "turnaround" story.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Alphabet (C shares), Apple, and NVIDIA. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, NVIDIA, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long March 2023 $120 calls on Apple, short January 2023 $57.50 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$35.39 (-0.76%) $0.27
Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
$89.77 (1.53%) $1.35
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$189.89 (-1.18%) $-2.26
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$117.47 (-0.61%) $0.72
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.35 (-0.14%) $0.23
Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$102.31 (-1.54%) $-1.60
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$118.22 (-0.55%) $0.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.