Intel (INTC)

Introduction

Why I Chose Intel

  1. Former Chief Technology Officer Pat Gel singer, who was in much of Intel’s “heyday” is now CEO.

  2. Intel is heavily reinvesting in the business by building two new fabrication facilities in Arizona.

  3. Price: Intel is hovering at a Price-to-Earnings ratio of 9.

  4. Significant tailwinds to the semiconductor industry, backed by the US government.

  5. Gelsinger and the team at Intel are thinking in decades, not quarters.

Terms You Need to Know

  1. Foundry – A semiconductor manufacturing plant. Many tech companies are “Fabless” meaning they rely on foundries to make the chips for their products.

  2. Moore’s Law – “In 1965, Gordon Moore made a prediction that would set the pace for our modern digital revolution. From careful observation of an emerging trend, Moore extrapolated that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace. The insight, known as Moore’s Law, became the golden rule for the electronics industry, and a springboard for innovation. As a co-founder, Gordon paved the path for Intel to make the ever faster, smaller, more affordable transistors that drive our modern tools and toys. Even over 50 years later, the lasting impact and benefits are felt in many ways.”

Graph of Moore's Law, showing exponential increase in components per integrated function

Moore’s Law on a logarithmic scale, doubling efficiency every two years.

Notice how this is a logarithmic scale, showing an exponential growth, essentially doubling every year. This is the main law which drives the semiconductor industry. Businesses, and by extension, nations are in a perpetual race against each other to stay at the top.

Historical Performance

For the past year Intel has underperformed the S&P500 significantly:

Over the last year the S&P500 gained 18% while Intel fell 13%.

In the rest of this report, we will look at why that is, and get a better picture of what Intel is doing.

Selected Financial Data

Here’s where Intel sits. You can see Intel is near a 52-week low, but short interest is at 1.5%. Not many people are betting against Intel.

Intel selected financial data

An overview of selected financial data for Intel.

The basics of the business

Intel makes semiconductors. Semiconductors are extremely important in today’s world and are becoming more embedded in everyday life as technology advances around the world.

Why Semiconductors are So Important

“Semiconductors such as memory chips or processors are a foundational technology and the backbone of modern society. Not only are they a prerequisite for any endeavors into emerging technologies, such as artificial intelligence, quantum computing or autonomous vehicles. But every industry relies on access to those chips.” the_global_semiconductor_value_chain.pdf (stiftung-nv.de)

It’s very important to know that these chips are everywhere:

  • Phones

  • Cars

  • Appliances

  • Utilities

  • Transportation

Without them, our way of life would cease to exist very quickly. No chips? No TV, cars, computers, phones, or internet.

Most semiconductors come from a foundry (business that make the semiconductors) called Taiwan Semiconductor Manufacturing Company, or TSMC. They make approximately 55% of all semiconductors in the world.

Taiwan Semiconductor Manufacturing Company

This is important because Intel is a customer of TSMC, as are so many other powerhouse businesses. Chances are, you use semiconductors from TSMC every day:

Top TSMC customers 2021

“Why would Apple, Nvidia, and Intel buy semiconductors from TSMC if they make their own semiconductors?”

Great question.

The answer is because Apple and Nvidia do not make their own semiconductors but instead rely completely on fabs like TSMC to supply them. This is called a “fabless” company. Intel makes their own and partially relies on TSMC to supply specialty products. It’s a very interesting dynamic.

The semiconductor industry is extremely complex and competitive, with companies specializing all over the world. A good example of this is Intel buying from TSMC while Intel builds the capabilities to build their own.

One thing that’s important to note is that the semiconductor industry is flooded with relationship dynamics that would put most high schools to shame. For this reason, I am not going into detail to outline the entire semiconductor industry, only hitting on the top level of what I think is important for investors.

The best metaphor I can think of is a farmer and grocery stores. Some food companies don’t grow any food, but they call themselves a “farm.” Nvidia Farms buys from TSMC growers, then packages and sells those products at market.

This is an extremely oversimplified metaphor, but helps to visualize the interplay between fab, fabless, and Intel.

Intel intends to bring the whole package: fabrication and bringing it to market. “Straight from the farm to your table!”

Another note: there’s more steps, and more processes, but this is the general idea.

How Intel Makes Money

Intel’s core strategy is this product leadership, open platforms, and manufacturing at scale. It’s an extremely tall order:

Intel's strategy

Here’s the different segments within Intel and how much they contribute to the overall business:

Intel products

Client Computing Group (CCG)

This is the traditional CPUs you find in laptops and desktops at home and offices. This segment is Intel’s highest earning, with 51% of revenue.

Data Center Group (DCG)

“DCG develops workload-optimized platforms for compute, storage, and network functions. Market segments include cloud service providers, enterprise and government, and communications service providers.”

DCG accounts for 33% of revenue.

Internet of Things Group (IOTG)

This is an interesting segment within Intel. If you’re not familiar with the Internet of Things (IOT) then here’s a primer: A technical primer on the Internet of Things | Deloitte Insights

The IOTG brings in a small 5% of revenue.

I think that the future for IOT is huge, but not for a long while. We are still early in this segment.

Mobileye

Mobileye is an Intel company that focuses on the auto industry. “Mobileye has agreements with six OEMs, including BMW, Nissan and Volkswagen, to collect that data on vehicles equipped with the EyeQ4 chip, which is used to power the advanced driver assistance system.”

Mobileye only brings in 2% of revenue, but the implications here are interesting. With Intel Mobileye’s newest chip, automakers can bring automated driving to cars | TechCrunch

Non-volatile Memory Storage Group (NSG)

This is Intel’s memory group. The primary product here is Solid State Drives, or SSD’s. (Thank you to Dylan for pointing out that Intel is getting out of the memory business and focusing solely on chips.)

Programmable Solutions Group (PSG)

This group brought in 2% of revenue. “Includes programmable semiconductors, primarily FPGAs and structured ASICs, and related products for communications, cloud and enterprise, and embedded market segments.” Check out the links at the end of this report if you want to learn more about programmable solutions.

Revenue By Segment

Here’s a visual that helps summarize the above:

Intel revenue percentage by segment

Intel % revenue by segment.

It’ll be interesting to see how this pie evolves over time as Mobileye, IOTG, and PSG grow.

IDM 2.0

IDM stands for “Integrated Device Manufacturer.”

Intel has always designed and manufactured their own products, but with their IDM 2.0 strategy, they will produce more while simultaneously relying on external foundries. Moreover, they will provide foundry services for customers:

Intel IDM 2.0

 This is a lot. Intel is basically multiple businesses wrapped into one. The main takeaway is this: Intel makes semiconductors, chips, and software that is essential to everyday life in today’s world.

Customer’s perspective

Intel is engaged with their customers in a couple of ways:

  1. Through supplying the Client Computing products, like CPUs and comparable products:

Intel CPU

Intel CPU.

2. Through supplying support products in everyday technologies: hospitals, transportation, national defense, and automation.

Intel has a robust customer perspective:

“Mr. Biden said that America was in a “stiff economic and technological competition” with China. He chose the words deliberately, knowing that while it sounds obvious to American ears, Chinese officials in recent months have protested the use of the word “competition,” declaring that it has echoes of a Cold War-like contest.”

“We’re going to insist everyone, including China, play by the same rules,” Mr. Biden continued. “We’re going to invest whatever it takes in America, in American innovation, in American communities, in American workers.” “Today, we barely produce 10 percent of the computer chips despite being the leader in chip design and research,” he said. “We don’t have the ability to make the most advanced chips now, right now.”

Pervasive shortages of chips, which are needed to power everything from cars and washing machines to medical equipment and electrical grids, have forced some factories to shutter their production lines and knocked a full percentage point off U.S. growth last year, according to some estimates.

While the Biden administration has billed Intel’s new investment near Columbus, Ohio, as a partial remedy for supply chain disruptions that have led to global chip shortages and spurred inflation, the project would do little to resolve any economic problems in the short term. The Ohio plant, the first phase of what Intel said could be an investment of up to $100 billion, is not expected to begin operation until 2025, and many analysts have forecast chip shortages to begin to abate later this year.

  • “The quality of a business is the quality of its customers.” With the entire United States and the rest of the world hungry for chips, Intel is in a prime place to fill the position.

  • Intel gets opposition lately, but if they disappeared tomorrow there would be extreme pandemonium both from companies around the world and direct customers.

  • “The more a customer needs a product or service, the less the earnings of a business will fluctuate.” The world is not only addicted to technology, but the technology has become the lifeblood of modern era. Companies like Intel must survive and thrive for the modern era to continue. People don’t realize just how much they need Intel. If Intel disappeared tomorrow, their competitors would initially jump for joy, then panic at the sheer demand placed on them to fill the void.

From a customer perspective, Intel is sitting in a perfect spot to supply meaningful products in a high-demand industry.

But what about the market share Intel lost in the last decade?

I’ll get into that below, but the main take is this: Intel experienced great success then got complacent.

Let’s see how this plays into their strengths and weaknesses:

Strength and Weaknesses

Competitive Landscape

The semiconductor industry is tough. Intel lost significant market share to Taiwan Semiconductor Manufacturing Co, Advanced Micro Devices Inc., and Samsung Electronics in the last few years. Apple announced in 2020 that they were leaving intel to make their own chips, dealing another blow to Intel. However, these chips are made by Taiwan Semiconductor Manufacturing Co.

“The M1 chip is the most powerful chip that Apple has created to date, and it is similar to the A14 chip in the latest ‌iPhone‌ and iPad Air models, built on a 5-nanometer process by Taiwan Semiconductor Manufacturing Company (TSMC). TSMC builds all of Apple’s chips and has done so for many years.”

It’s worth noting here that TSMC currently holds over 50% of the market for fabricating chips.

Regarding AMD, here is what Pat Gelsinger said in response to AMD’s rapid gains in the x86 CPU market (both consumer and server), he said that “I haven’t lost share to AMD, I’ve given share to AMD, because they didn’t have the capacity, right. So, a lot of this is just catching up to our growing market and years of under-investment.” Intel CEO on CPU Market Share Loss: I haven’t lost share to AMD, I’ve given share to AMD | Hardware Times

Here is the market capitalization of Intel and its major competitors over the last 5 years:

Intel competitor 5 year performance

Intel, in purple, used to be the reigning champion of the semiconductor industry. Let’s zoom out a little. Here is the 20-year market capitalization of Intel’s competitors:

Intel 20 year market share loss

Intel was still at the top but losing market share all the way from 2000 until 2017 when TSM started overtaking Intel. One thing to notice is the rate of increase among Intel’s competitors while Intel has remained stagnant for over 20 years. This stagnation was brought about by complacency.

Culture: Overcoming Complacency

In his letter to employees, Pat Gelsinger lays out a framework for the future:

“I am confident that we can be the world’s leading semiconductor company in a landscape of tremendous change and set a course for a new era of innovation and technological leadership. To seize this tremendous opportunity, we must focus on four priorities:

  • Be the leader in every category in which we compete. We must stay ahead of customer needs and become more agile in an incredibly competitive market and prove the differentiated value of our products, our roadmap and our manufacturing capability.

  • Execute flawlessly to our commitments. Customers must be able to rely on Intel for their products and their strategies for the future. While we must set aggressive targets to regain share and leadership, they must also be achievable and done with the highest quality.

  • Passionately innovate with boldness and speed. We will be a fountain for continuous innovation in the industry through our unmatched IP, engineering talent and research into new next-generation computing architectures.

  • Reignite our culture to attract and motivate the best engineers and technologists on the planet. Intel must be the place where the best talent in the world can fulfill their dreams. We need to untether our enormous energy and potential for our business with a vibrant, inclusive and open culture. We need to bring back some of the Groveian disciplines for direct, transparent and data-driven decisions and accountability.”

What is “Groveian”? It’s a recall back to Andy Grove, former COO and CEO of Intel.

Any Grove was a powerhouse of an engineer, leader, and strategist. Responsible for much of Intel’s success in the early days, Andy said “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”

Fun Fact: Any Grove invented the OKR framework (Objectives and Key Results) for management. Here he is explaining:

Andy Grove and OKRs. Andy was quite the business driver.

You can hear a little bit in his voice, just how much of a force he was.

Andy was the CEO of Intel from 1987 to 1998. This period for Intel was extremely productive and profitable. During that time, Intel performed very well with a 42.3% CAGR over 12 years:

Intel performance under Andy Grove

Andy Grove led Intel extremely well.

The reasons for this rise weren’t completely Andy’s leadership, but the tailwinds of the industry. However, Intel survived while a multitude of others did not.

Intel was in the memory chip business and were being undercut by Japanese competitors. After a year of strategizing, Andy took Intel to a new route: microprocessors.

“I was running an assembly line designed to build memory chips. I saw the microprocessor as a bloody nuisance.”

This didn’t stop him.

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”

This shift kept Intel afloat and proved to be a wise decision that would pave the road for profitability for years to come.

However, that success, and the retirement of Andy, brought about a period of complacency. It was not uncommon for Intel to treat its vendors with shoddy courtesy.

Complacency is a culture issue, and one that new the new CEO Pat Gelsinger is eradicating with extreme prejudice.

“Intel has been struggling, and Gelsinger says that stems from “the cultural aspects.

It’s like a desert that hasn’t been watered for a while,” he says. “As soon as the first rain comes, the flowers start blooming [and] it comes back quickly. But when you fall behind in key areas, it takes you awhile.

Gelsinger is no stranger to Intel’s culture. He started at the company in 1979 and stayed there for 30 years before leaving in 2009. He rejoined Intel as CEO in February 2021 from VMware, where he was president and COO.

In order to return Intel to a leading position in the marketplace, Gelsinger says the company must get back to a “Groveian culture” of “disciplined decision making” and a “tough, aggressive, engineering-centric culture.

Some of Intel’s stumbles were a result of arrogance and “too much hubris,” he adds. “Our competition is out to eat our lunch. And if we don’t fight for it every single day, we’re at risk of losing it.” Intel’s CEO wants to rebuild a ‘tough, aggressive, and engineering-centric culture’ | Fortune

This new culture is at the top of Intel’s list of strengths.

Brand Recognition

Intel is the 17th most recognized brand in the world according to Interbrand. Having this strong brand makes everything a bit easier. This frees Intel to focus on the bottom line that drives results: execution in developing technologies.

Think about it: if Intel knocks it out of the park in creating an innovative technology that puts them at the top of the semiconductor industry, then the rest of the world will flock to it. Their established brand frees them to focus on doing better than the competition.

Research and Development Spending

One of the last major strengths of Intel is their commitment to R&D. Going back to Moore’s Law, Intel is in the innovation business. There is no “business as usual.” If Intel stops innovating, they get left in the dust and their competitors take over completely.

Intel knows this, which is why they invest heavily in the R&D department:

Intel R&D history

With R&D expense it’s important to note that generally the higher the expense, the more return on investment. Therefore, I’m not comparing R&D expense as a percentage of revenue. Intel invested over 15 billion into R&D in 2021. This will help with getting Intel back to the top of the semiconductor industry. Smaller and newer companies cannot hope to compete with this.

The USD

This last strength is interesting. Not many other businesses hold the attention of the US government, but Intel has the attention of the Biden administration.

We are all experiencing a slight hiccup in chip shortages across the country and the world, but a real chip shortage can short-circuit a nations defense. Drones, communications, defense information (like Palantir), and even front-line weapon systems (tanks, aircraft, and missiles) are all at the mercy of readily available chips from companies like Intel.

We’ve all heard of the negatives of relying on foreign energy, but not many are talking about the inherent danger in relying on foreign chips. This is one of the main reasons why the white house is interested in the well-being and success of Intel so that the United States is not dependent on outside sources for national defense.

Semiconductors are an essential building block in the goods and products that Americans use every day. These computer chips are critical to a range of sectors and products from cars to smartphones to medical equipment and even vacuum cleaners. They help power our infrastructure from our grid to our broadband. The United States used to lead the world in global semiconductor manufacturing. But in recent decades, the U.S. lost its edge—our share of global semiconductor production has fallen from 37 percent to just 12 percent over the last 30 years. FACT SHEET: Biden-Harris Administration Bringing Semiconductor Manufacturing Back to America | The White House

This kind of backing from the heart of our federal government is a significant strength for Intel.

Weaknesses

Intel has what I’m calling “legacy weakness” that needs to be overcome by leadership. These below are my top two all-encompassing weaknesses that I think Intel needs to aggressively address in order to move forward with their vision.

Talent

The biggest weakness for Intel is their reliance on talent. It’s no small feat to innovate in microchips and semiconductors, and the fight to find and retain that talent is ongoing.

This inherent weakness is due to the industry, and not something brought about by Intel. In fact, Intel displays great initiative in overturning their culture to attract the best talent in the world.

This trend started in 2021 as we can see below. Pat Gelsinger brought his vision to the world and started recruiting the best and brightest to work on the hardest problems in the world: technological advance.

Intel employees

Intel employees over time.

Operational Tempo

Going back to Moore’s Law, the demand for ever-better computing is the problem for businesses in the industry: whoever makes/designs the best wins market share. The problem is, making the equipment that makes the chips is an entirely different and complex process, one that takes years. Because of this, Intel would design and produce equipment to make their new products only to be outdone by Moore’s Law and fall behind companies like AMD and TSMC. In short: their iteration cycle took too long. The operational tempo was inadequate.

Time is either the best friend of a business or the greatest enemy. Over the last few years Intel became a slave to time. One way this happened is with their non-modular equipment.

From my understanding, Intel’s competitors have equipment that can be updated then used to create the next generation of products while Intel needs to completely update their equipment every time. It’s a very complex topic, but the overall theory makes sense.

Intel must do what it takes to iterate faster, more efficiently. If this doesn’t happen it is a possibility that Intel becomes the Blockbuster of the semiconductor industry while AMD and TSM take over even more.

This is a monumental task and the heart of Intel’s turnaround.

Operational and Financial Health

IDM 2.0: The Big Operation

IDM, or Integrated Device Manufacturing, is Intel’s primary strategy to become the top player in the semiconductor industry. Most semi companies dwell in one space, whether it is design, fabrication, or assembly. An IDM model, shown below, has all these things.

IDM 2.0 Strategy

When Intel is fully up and running with the new fabrication sites in Arizona it will be able to provide foundry services for fabless companies, directly competing with TSMC.

largest foundries

These foundries create products for these “fabless” companies:

fabless companies

Intel will be competing with all these companies, and able to do so on very stable footing since a large part of their process in in-house.

Financial Health

Liquidity: Intel has good liquidity with a quick ratio of just over 1 (meaning they could pay off all short-term debts in a pinch). Here is Intel’s historical quick ratio annually:

intel quick ratio

Solvency: Intel has a great history of debt-to-equity.

Intel debt to equity

I’m conservative, so I like to see a D/E ratio of 0.4 or lower. This will also be nice during a time of intensive re-investment for Intel. They don’t have to worry about debt payments if their profits slow for a while.

Operating Efficiency and Profitability: Below you’ll see Intel’s Gross, Operating, and Net Margins.

Intel margins

From this we can see a couple of things.

  • Intel suffers from declining profit margins. This will likely become a thing of the past as they innovate and execute on their vision and return to being the world leader in the semiconductor industry. It’s important to note that this is an extremely long view (>5 years). Intel will spend significantly on R&D (among other things) to help increase profits further in the future, but there will be substantially less cash flows because of this. Intel is taking the long hard road, which I’m convinced will translate to market supremacy and solid returns in the next 10 plus years.

  • Intel tightened its financials to increase Net Margins beginning in 2018. Another great sign of fiscal discipline.

  • Intel has stable gross and operating margins. Stability is our friend.

Distribution of Earnings (Cash Flow)

I love how Intel lays out their cash flow summary in their annual report. Pay special attention to their cash flow section (which I highlighted):

cash flows

Here’s where those cash flows are going:

“Our first allocation priority is to invest in R&D and capital spending to capitalize on the opportunity presented by the world’s demand for semiconductors. We expect to increase our R&D investment and our capital investments in support of our IDM 2.0 strategy.”

Here’s where they intend to put the rest:

  1. R&D into the IDM 2.0 strategy

  2. “. . . invest in and acquire companies that complement our strategic objectives. We look for acquisitions that supplement and strengthen our capital and R&D investments. Our key acquisitions over the last three years include our 2020 acquisition of Moovit to accelerate Mobileye’s mobility-as-a-service offering and our 2019 acquisition of Habana Labs to strengthen and extend the reach of our AI portfolio.” Intel also recently bought Tower Semiconductors to help them with their Foundry part of the IDM 2.0 strategy. Intel to Acquire Tower Semiconductor for $5.4 Billion

  3. “Our third allocation priority is to return cash to stockholders. We achieve this through our dividend and share repurchase programs. We expect our future stock repurchases to be significantly below our levels from the last few years.”

Here is a summary of Capital Investment and Free Cash Flow:

cash from ops

Summary of re-investments and cash to stockholders. Note the focus on a steady dividend at $5.6 billion while decreasing buybacks. (I like it when a company prioritizes money in my pocket, even more so when it’s 3rd priority to R&D.)

cash to stockholders

Management

I am overly tough on management, and doubly so with Pat Gelsinger, as the semiconductor industry is not an easy place to be. “The most logical predictor of the future success of a business is its management.” The Investment Checklist: The Art of In-Depth Research: Shearn, Michael: 0884450426852: Amazon.com: Books

However, Pat has a strong technical background, excellent communication, and a history of getting things done: “Just more than a month into his job as CEO during “Intel Unleashed,” Pat announced Intel’s IDM 2.0 strategy. Intel, the biggest U.S.-based company to both design and build its own processors, would double-down on manufacturing. It called its own manufacturing system a key advantage and created plans to start a world-leading foundry business, Intel Foundry Services.”

One of the main ways in which I measure leadership is asking “Are they doing what they say they would do?” and the answer is a resounding “YES.”

“Intel broke ground in September on two new leading-edge chip factories — Fab 52 and Fab 62 — at in Chandler, Arizona.” This is part of Pat’s IDM 2.0 strategy.

Doing What He Says

Measuring management isn’t rocket science. Are they doing what they say they would do? Are they communicating the good and the bad with investors? Are they communicating the overall vision with the stakeholders? Are they upfront with struggles?

Pat Gelsinger answers “yes” to all these questions. You can look up any article or interview with Pat and he’ll be clear about what they are doing and where they are going.

Firm on the vision, flexible on the path

Another thing I look for in management is firmness on vision and flexibility on paths. Pat understands very well that if Intel is not a leader in producing the best technology in the industry, then they will not own the industry. Pat is clear in his intention to take Intel there.

This excerpt is from Stratechery. Writer Ben Thompson interviews Pat. I think it’s a great look into what’s going on:

Ben Thompson: Pat, it’s good to talk to you. I appreciate you taking the time. So last week, AMD briefly passed Intel in market value, and I think Nvidia did a while ago, and neither of these companies build their own chips. It’s kind of like an inverse of the Jerry Sanders quote about “Real men have fabs!” When you were contemplating your strategy for Intel as you came back, how much consideration was there about going the same path, becoming a fabless company and leaning into your design?

Pat Gelsinger: Let me give maybe three different answers to that question, and these become more intellectual as we go along. The first one was I wrote a strategy document for the board of directors and I said if you want to split the company in two, then you should hire a PE kind of guy to go do that, not me. My strategy is what’s become IDM 2.0 and I described it. So if you’re hiring me, that’s the strategy and 100% of the board asked me to be the CEO and supported the strategy I laid out, of which this is one of the pieces. So the first thing was all of that discussion happened before I took the job as the CEO, so there was no debate, no contemplation, et cetera, this is it.

Second is, so let’s seriously ponder that for a moment. Let’s ignore the fact that we’ve laid out the IDM 2.0 strategy and let’s use AMD as a case study for a moment. When did they sell their fabs?

BT: Eleven years ago? Twelve years ago?

PG: 2008.

BT: (laughing) Oh, man. Fourteen years ago!

PG: Okay. And then how many years was AMD a rocking success?

BT: Really just the last couple.

PG: Last three years. So it took them eleven years to get over it at that level, so I’ll just say in this eleven years and when they spun it out, there was a significant commitment that what became GlobalFoundries would be their leading edge process technology provider.

BT: Right. And GlobalFoundries bailed out.

PG: GlobalFoundries failed to stay current on the front end of technology in the process, and now, they’re clearly a tier-two mature node foundry for the industry, and doing well, but they had to redefine their business model because they couldn’t compete with TSMC or be part of the Big Three, I’ll call it Samsung, TSMC and Intel on leading edge.

There are companies where I wish the CEO, or anyone on the executive team, communicated this way. Few do. If I am going to invest in a company, I want to be treated like an investor, not a last thought. Intel and Pat do this very well. That’s good management.

It’s worth noting that Pat’s vision is a destination that directly ties to Intel’s profitability and ability to solve global problems. There are a million paths to get there, and those decisions tie back to Pat’s decision to keep things “Grovian” as mentioned before.

This means that Intel is re-adopting Andy Grove’s management style of using Objectives and Key Results (OKRs). The use of OKRs is what helped bring Intel to the forefront of the market in the 70s, and I’m a big fan of the style. (Fun fact: I use OKRs for The Irreverent Investor!)

Future Growth Opportunities

The future growth of the semiconductor industry is undeniable. Our use of chips in everything ranging from phones to smart lighting in our homes tells of a continuing rise in the need for these chips. It’s an exponential need on a global scale.

Intel’s IDM 2.0 strategy requires global foundry services, and they just moved in that direction with their latest purchase of Tower Semiconductors, an Israeli semiconductor foundry. Tower runs multiple fabs in Israel, Italy, California, and Texas.

From Pat Gelsinger on buying Tower Semiconductors:

“I fully want to merge these businesses together going forward, and that doesn’t mean this is a little satellite under this thing that we’re getting started in IFS. We’re going to bring those together, and I fully expect that the outcome is a fully integrated business unit that heavily leverages the five thousand people in Tower. Its thirty years old, Israeli-centered, and we know a lot about having good Israeli discipline as part of our team.”

Intel has other growth opportunities, but I think the IDM 2.0 overarching strategy is the main focus.

Conclusion

Thanks to friend and supporter Alex for summarizing the main question about Intel: “You basically say that Intel has faced internal / cultural issues for the past 10+ years, if not longer. Can they fix that overnight? Do we have other examples to support that claim?”

Pat Gelsinger talks a big talk, but that’s part of being a CEO of a large organization. It’s about communicating vision and getting everyone on the same page. It’s a chicken-and-the-egg problem, where executing on the vision takes people believing in the vision.

I consider this very important first step accomplished by Gelsinger, so in my book he’s 100%. On top of this we have clear communication about setbacks and a payoff not coming until possibly 2024/2025. Communicating unpopular updates on the business to investors is another huge green flag where others see it as a red flag.

 Now, the cultural issues that Pat needs uproot are deep within the company. I recently found out that outside vendors had a hard time dealing with Intel due one of their finance teams being a pain to deal with. This doesn’t surprise me. It’s common for larger companies to try to get away with terrible vendor service because ‘who’s going to stop them.’ This is one symptom of a complacent culture. I think Pat will turn this around quickly.

Further Reading and Notes

Intel, TSMC, and Samsung entered into a consortium agreement while I was polishing this report. You can read more here: Samsung, TSMC, Intel to form a chip stacking consortium (techwireasia.com)

It’s a surprising development, one which will have ramifications for years or decades, but we are getting a little out there.

Here’s some useful links for further reading in the semiconductor industry (you can spend a lifetime learning about this stuff):

  1. From CEO Gelsinger: Semiconductors Run the World (intel.com)

  2. The best primer on the semiconductor industry (and required reading IMO): the_global_semiconductor_value_chain.pdf (stiftung-nv.de)

  3. Internet of Things (IOT) primer: A technical primer on the Internet of Things | Deloitte Insights

  4. Mobileye: With Intel Mobileye’s newest chip, automakers can bring automated driving to cars | TechCrunch

  5. Mobileye Website Mobileye | Autonomous Driving & ADAS (Advanced Driver Assistance Systems)

  6. Fabrication concerns from McKinsey: Semiconductor design and manufacturing: Achieving leading-edge capabilities | McKinsey

  7. Quick 5-minute video on microchips: From Sand to Silicon: The Making of a Microchip | Intel – YouTube

  8. Biden Looks to Intel’s U.S. Investment to Buoy His China Agenda – The New York Times (nytimes.com)

  9. Andy Grove: early Intel powerhouse Andrew S. Grove | Encyclopedia.com

  10. Moore’s Law What is Moore’s Law? | Is Moore’s Law Dead? | Synopsys

  11. Top semiconductor blogs and newsletters:

    1. Stratechery

    2. Semianalysis

  12. Intel acquires Tower to support Foundry vision: Intel to Acquire Tower Semiconductor for $5.4 Billion

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