In high school chemistry, a teacher once demonstrated to us the concept of static equilibrium using a sealed glass jar half full of water. It may seem boring, he explained, but the jar was actually incredibly active with water evaporating and condensing in a flurry of activity beyond our ability to see. We thought of that teacher a lot this week as we explored the situation around Intel.
Our sense is that a lot is happening around the company right now, but very little is visible to those of us on the outside. (And for the record, we are very much on the outside. We have no confidential information or talkative internal contact whispering in our DMs.) There has been some news. The company announced the outcome of its high-stakes board meeting. There has also been a lot of commentary in the press with reports that Qualcomm and Broadcom allegedly looking at taking a stake. They are not changing their plan around divesting Mobile Eye. There are also reports that Broadcom and others are dissatisfied with what they have seen of Intel’s 18A manufacturing process. They lost Sony as a customer. The stock was up 10% or so for the week, but is still down for the month since they reported their poor Q2 results. Lots of back and forth, but no real change.
That being said, our sense is that a lot more is happening behind the scenes. As we pointed out in our note on the read-out from their Board meeting, the letter from the CEO to his ‘team’ contained two pages of securities law disclaimers. This is a clear sign that the company has some reason to treat every communication carefully. Although the company reported having a “productive and supportive board meeting“, the meeting took two days, and our guess is that they did not spend that time singing folk songs and giving each other group hugs of affirmation. We suspect that there is growing concern within the Board as to Intel’s direction.
From where we sit, the company seems to be facing four potential outcomes:
- Stay the course and push through 5 nodes in 4 years to emerge some time in 2026 or 2027 with competitive manufacturing processes and products. This is management’s plan and it makes sense with the minor reservation that they need to raise $30 billion to achieve it. We think of this as the One Intel Outcome.
- Get another bailout from the US government. However, this would likely come with serious conditions attached that would over time dilute the company’s commercial prospects. We think of this as the IBM Outcome.
- Split the company, sell the product business to one of several potential buyers and use those proceeds to fund the Foundry business. The problem with this is that those proceeds are not enough to get Foundry unit to where it needs to go. It would require the Product business to tie itself for some years to Foundry, which would at least partially hobble it. This likely leads to Foundry stalling technologically, and falling off Moore’s Law somewhere at or beyond 14A. We think of this as the Global Foundries Outcome.
- Things start to fall apart. They continue to lose share, their manufacturing processes do not live up to expectations, and results continue to deteriorate. Burdened by massive fixed costs, the company sinks and is forced to sell itself for parts. We think of this as the Nokia Outcome.
Of course these are the extremes, and reality likely ends up somewhere in the middle of all that. The Board has to decide if it wants to continue down the current path, gambling that they can pull out of the current spiral but risking a very bad outcome. Alternatively, it could reverse course, and split the company as many have urged them to do for years. This idea of splitting the company has been around for a long time and seems to have renewed momentum now in certain circles. Of course, this would likely require finding a new CEO, and take several painful years of restructuring to accomplish.
We have already stated our position that the company should not split up at this time, but that view is premised on the idea that 18A and 14A are going to work as promised, and we will not know that for several more months at least.
For us, two things are clear. First, the Board’s option space is steadily shrinking, outside pressure is mounting. They may not have the time they want or need to make a choice. Second, the company needs to change faster. Its old habits need to be swept away. They are no longer the giant that many inside think they are.
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