I have been suggesting here that Intel (NASDAQ:INTC) be broken up for more than four years. Those calls are getting louder as the company built around Moore’s Law falls further behind on both the chip design and the fabrication front.
Intel is due to open for trade Jan. 6 at about $51 per share. That’s carries a market capitalization of $209.4 billion on expected 2020 sales of $78 billion. This is despite a 33-cent per share dividend yielding 2.66%, one that might be boosted soon.
Activist investor Dan Loeb is now saying what I did, that Intel should go “fabless” and spin-out its fabrication plants to add focus and value.
His letter to the board called it an issue of national security.
Intel Stock and the Chipmaker’s Troubled Times
Intel’s problems have been building for over two decades, ever since the late co-founder Andy Grove gave up the CEO chair in 1998. Grove wrote a book called Only the Paranoid Survive. His successors rested on the great man’s laurels.
Intel was late to move to low-power chips. It was late in seeing the shift to mobile, and to OEM dominance of that channel. Over the next decade it failed in countless other areas. It has lost its lead in microprocessors to Advanced Micro Devices (NASDAQ:AMD) and its lead in chip fabrication to Taiwan Semiconductor (NYSE:TSM). It has ceded innovation to Nvidia (NASDAQ:NVDA).
Under former CEO Brian Krzanich, top women managers fled or were pushed out. When Krzanich himself was forced to resign in a sex scandal, Intel tried for a year to recruit a replacement. It finally settled on its chief financial officer, Robert Swan.
Swan has run Intel by the numbers. The company delivered $25 billion of operating cash flow for the first three quarters of 2020. It had $18 billion of cash and securities on the books at the end of September, against $36 billion of debt. The dividend costs $5.4 billion a year and the company’s buying back $10 billion in stock.
But value is out of style, especially in tech. Over the last year, shares are down nearly 16%. While the average S&P 500 index stock is up 46% over the last two years — Intel is up just 7.2%.
Make Intel Great Again
Intel’s fate is similar to that of other tech giants like Cisco Systems (NASDAQ:CSCO) and IBM (NYSE:IBM), which investors have shunned despite juicy dividends. Tech investors want growth. Intel shares remain 24% below where they were in August 2000, at the peak of the dot-com boom.
As Techopedia writer Kishore Jethanandani wrote recently, Intel is still focused on microlithography, burning smaller-and-smaller lines onto silicon. Meanwhile the industry has moved on to nanotechnology, with new materials like graphene and Indo Gallium Zinc Oxide (IGZO) changing chips from components into systems. The new techniques are additive, not subtractive. The result is that Intel has fallen behind in the very areas it pioneered.
The Bottom Line
Intel still has the cash and the equity needed to get back in the game, but it needs to move quickly.
Separating the fabrication plants from the design process may no longer be enough to create big returns.
Third Point’s Loeb is right: Intel’s problems are a national security issue. “America’s access to leading-edge semiconductor supply will erode, forcing the U.S. to rely more heavily on a geopolitically unstable East Asia,” he wrote.
That’s why now may be a good time to pick up some Intel stock. Action is required, and action will come. Pressure will be applied from both Wall Street and Washington for Intel to get back in the game.
Until it does you get a nice dividend. Buy low. Sell high.
At the time of publication, Dana Blankenhorn owned shares in INTC, TSM and NVDA.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write to him, tweet him or subscribe to his Substack.