The world's largest semiconductor company (as measured by revenue), Intel (INTC -9.20%), 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 1.26%), and myriad other chip designers like NVIDIA (NVDA 6.18%) 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 2.37%) 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.
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 -0.35%) and Alphabet's (GOOGL 10.22%) (GOOG 9.96%) 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.
