Intel (INTC) is in the midst of one of the most tumultuous periods in its 56-year history. Declining sales, missed opportunities to compete in the AI space, and a massive turnaround effort by CEO Pat Gelsinger looking to return the company to its former glory are putting significant pressure on the chip giant’s bottom line and share price.
And things for the company are only getting more interesting.
Last Monday, Intel announced that it signed a deal with Amazon (AMZN) to build custom chips for Amazon Web Services, a positive sign for the company’s nascent third-party foundry business.
Then, on Friday, the Wall Street Journal reported that Qualcomm (QCOM) reached out to Intel about a blockbuster takeover deal that would give Qualcomm a larger foothold in the PC and AI spaces. That’s not all. On Sunday, Bloomberg reported that Apollo Global Management (APO) has offered to make a multibillion-dollar investment in Intel to keep Gelsinger’s turnaround moving forward. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
It’s a lot to follow and even more to make any sense of. Luckily, I’m here to help break it all down for you.
Intel’s slowing sales and AI troubles
Intel is dealing with sliding sales and the unenviable position of having to take on market leader Nvidia in the AI space. For 2023, Intel reported full-year revenue of $54.2 billion, a 14% year-over-year decline from the $63.1 billion the company saw in 2022.
That included an 8% decline in Intel’s Client Computing Group, which sells chips for PCs; a 20% drop in Data Center and AI revenue; and a 31% decrease in Network and Edge sales. Intel did, however, report a 103% increase in its Intel Foundry Services, but that amounted to just $952 million.
Part of Intel’s woes have stemmed from the fact that the explosion in PC sales at the onset of the pandemic pulled Client Computing Group revenue forward several quarters, creating a boom and bust. Consumers bought new computers in droves for work and play, sending chip revenue soaring. But millions of consumers don’t usually buy new PCs at the same time. With so many people holding new computers, there were fewer consumers looking for upgrades, and sales entered an extended slump that sent shipments plummeting for eight consecutive quarters.
Sales are picking up again, though. In July, IDC said the PC market grew 3% in the second quarter, notching a second consecutive quarter of growth. But the industry still has a way to go.
At the same time, Intel is facing a new threat from Qualcomm, which began offering its Snapdragon X Elite and X Plus chips in Windows PCs earlier this year as an alternative to Intel’s processors. Those chips provide improved performance and power versus Intel’s older offerings and are meant to compete with Apple’s (AAPL) exceptional M family of chips that power its MacBooks.
Intel is fighting back, though. Earlier this month, the company showed off its Core Ultra 200V line of processors that it says can outpace Qualcomm’s chips.
Flagging PC sales also impacted graphics giant Nvidia (NVDA), which saw sales of its video game graphics chips deteriorate after the pandemic boom. But the company, unlike Intel, has managed to exploit its early investments in AI to take advantage of the surge in interest caused by the debut of OpenAI’s ChatGPT in November 2022.
That helped catapult Nvidia to the forefront of the semiconductor industry and sent its stock to extraordinary new heights, rising more than 860% over the last two years and 191% in the last 12 months.
Intel is working to try to catch Nvidia with its own Gaudi line of AI accelerators. On Tuesday, the company debuted its latest Gaudi 3 AI accelerator and announced that IBM will use it as part of its IBM Cloud offering.
But with Gartner estimating that Nvidia controls more than 70% of AI chip sales, it’s an uphill battle.
Intel’s foundry services
Intel is also battling for position as a chip manufacturer for third-party clients. The plan is for the company’s foundry business to operate as a subsidiary of Intel that builds processors for customers looking for an alternative to TSMC, which is among the world’s largest chipmakers
But the buildout is costly and Wall Street isn’t completely sold on the idea. Analysts at Citi Research have said Intel should exit the foundry business altogether so that it can improve margins and earnings per share.
In September, however, Intel announced a multibillion-dollar deal to "produce an AI fabric chip for AWS on Intel 18A, the company’s most advanced process node." The company is also set to build a custom version of its Xeon 6 chip for Amazon.
The news comes after Intel announced that Microsoft signed on as a manufacturing customer in February. Two big-name companies are certainly a start for Intel, but it’s going to need to sign a slew of customers if it hopes to grow its manufacturing segment to match competing chip fabricators.
Qualcomm and Apollo
Intel’s PC and AI woes have left it as a potential takeover target, which is where Qualcomm and Apollo enter the mix. Qualcomm, according to the Wall Street Journal, wants to buy up Intel, though it’s unclear if the company would hold on to all of Intel or sell portions of its business segments. The deal is also sure to generate plenty of antitrust concerns, as the companies are two of the most important chip firms in the US.
Apollo, meanwhile, looks to favor Gelsinger’s plans and could invest up to $5 billion in Intel to follow through with the effort, Bloomberg reports.
Now investors will have to wait and see whether Intel moves forward with either company or continues to try to go it alone.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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