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By Chuck Saletta*
The company is struggling at the moment, but its investments do provide hope for a better future.
US semiconductor giant Intel (NASDAQ: INTC) recently cut its dividend from $0.37 per share per quarter to $0.125, knocking out nearly two-thirds of its quarterly payment. A slashed dividend is usually a sign of a company in trouble. With the cut coming on the heels of revenue misses and employee layoffs, there certainly looks like there’s good reason to worry about Intel.
A key reason for Intel’s trouble is that it has lost its clear dominance in the computer CPU market to archrival AMD (NASDAQ: AMD). With Intel’s manufacturing process still trying to play catch up with its key competitor, it’s clear that Intel has to make a ton of investments to remain competitive in the industry.
Can the future be better for Intel?
While the current conditions certainly look rocky for Intel, the stock market tries to value companies based on their future prospects, not their recent challenges. On that front, there are decent reasons to believe that Intel is making the changes it needs to make to give it a shot at a better future.
First and foremost, Intel is investing over $20 billion to build a new fabrication site in Ohio. That’s on top of a $20 billion expansion investment in its Arizona site. That’s a lot of money being spent today on the infrastructure to keep the company competitive for the future. On top of that, even with its current fab technology, Intel’s desktop processors are still delivering performance benchmarks on par with AMD’s.
Said differently, Intel may be near the end of its ability to produce high-end products from its current generation of fabrication facilities, but it still has ways to profit from its existing sites. It’s also likely, too, that it will still be able to use its existing capacity to make other products once its latest generation infrastructure is up and running. After all, not every single electronic device requires the highest tech fabrication to be useful.
In addition, while Intel is demonstrably behind the competition when it comes to shrinking the size of transistors, the fact that its processors have kept up anyway shows it has an edge in chip design. In an era where the laws of physics are making it ever more difficult to continue to shrink transistors, that design edge may very well be a differentiator for quite some time.
That all adds up to a business where there certainly appears to be a path to reasonable future ahead, despite the dividend cut.
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So why is Intel’s stock down?
Although Intel is making the investments it needs to make to remain competitive for the long haul, the reality is that it faces challenges today that aren’t going away just because it’s building for its future. The dividend cut and layoffs happened because of the revenue miss. That miss happened because while Intel remains competitive, it has lost its slot as the clear leader in the microprocessor business. Without that crown, it risks having to cut prices to maintain demand.
Also, as physics makes it tougher to keep shrinking transistor sizes, it also gets tougher to build stronger performance levels into any given chip. This could lead to a slowdown in computer upgrade cycles, as people and businesses no longer get enough benefit from upgrading their technology. Instead, Intel will have to rely on continuing to find new use cases to find growth beyond the simple “wear out and replace” cycle.
Of course, with Artificial Intelligence just starting to take prominence, there is a great chance that particular use case of computing power still has room to run. With Artificial Intelligence so reliant on graphics processing units instead of the raw computer processing horsepower that Intel is known for, that could become a whole new market for Intel.
Intel’s first major foray into graphics processing — the ARC series — hasn’t yet lit the world on fire. Still, the company appears to be committed to continuing to invest to improve its position in that space, which could very well turn out to be a path to future growth.
Put it all together – and find a company that’s down, but not out
Intel’s challenges are clear, and as its dividend cut and layoffs have shown, the path ahead is anything but certain. Yet its shares are down substantially from their prior lofty levels to reflect that uncertain future. That lowered share price just might be what investors need to balance those very clear risks with the potential rewards that could come if Intel’s substantial investments in its future pay off.
At the time of publication, Chuck Saletta owned shares of Intel and had open options positions on Intel.
