The sign of the timing

Intel's mid-quarter update is not a good sign

The age of the social media algorithm has divided humanity. Everything is about being for or against something, not just a little bit. You have to hate or love - nothing in between.

People who read my posts know I try to stay neutral, but I also try not to be boring. My headlines are sometimes provocative, but I am not entrenched in one camp or the other.

I analyse from a point of curiosity, as CEOs are not here to enlighten us. They need to sell the company and rally the troops. I try to uncover what really is going on.

I have taken some critiques for my posts and analysis of Intel’s situation. While that might be warranted, I want to state my neutrality about Intel and all other companies I cover. I don’t care about who wins or loses. I love to follow and analyse the battle.

Intel has been in this industry for as long as I have. I have been an investor in all three leading data centre processing companies since (one out of three ain’t bad) the mid-nineties. I am an investor in most of the companies I write about. Most of my positions are more than 20 years old, so I don’t spend time talking stocks up and down.

I have a hard time imagining an industry without Intel. I have many friends who have worked for Intel and rightfully have been “Intel arrogant” when that was still a thing. And I would have given anything for an Intel badge when I was young. Intel was and is a truly outstanding company. But it also has deep and life-threatening problems.

From a strategy standpoint, the IDM 2.0 strategy is sound, and Pat Gelsinger and team have been open and direct about the problems. But I believe things are getting significantly more difficult.

Pat Gelsinger has not tried to hide that the Intel recovery is not around the corner. Nevertheless, the quarterly results have been worse than Intel's already depressing plan for 2024.

When Intel entered 2024:

1. It planned to be a $100B$ company by the end of the decade, but that plan has now been cancelled. Given the 2024 results, it is not possible to reach that goal anymore.

2. Declaring that it was the only company that could participate in 100% of the TAM. However, Intel has now stated that it is too far behind Nvidia in training to participate.

3. The IDM 2.0 strategy was ready to be executed. We have seen the 2.1, 2.2, and 2.3 strategies in just a few months. The latest strategy was not even unveiled at an earnings call, which is the norm.

If you know my work, you will also see that I am more interested in market timing than market size. Adapting to change is much more important than adjusting to size.

And the Intel timing worries me. If things run smoothly, would Intel choose the middle of the quarter (from an earnings call perspective) with a significant strategy update?

With a “Letter to employees” that, in reality, is the IDM 2.3 (2024-Q3) strategy adjustment? Is it so bad Intel even had to sprinkle good AWS news (that is not urgent or imminent) now and not wait until the quarter's end?

This is why I also have to change the timing of this post. Something serious is happening in Intel right now, and it does not sound good.

Let’s tackle the headlines.

The X86 Franchise

Significant changes to how the product divisions are organised are not new to Intel. During the good years, the divisions stayed stable, but after revenue declined, the reorganisations started. After 2021, the divisions were reorganised every year, always around the fact that Intel is a Client company with a data centre business and a few small business areas struggling for attention. It is fair to assume that there is some causality between the change to divisional structure and the business situation.

With the recent announcement, the last divisional structure only lasted two quarters and was communicated mid-quarter.

This time, the Network and Edge (NEX) group is being stripped of the Automotive Business and the Edge business is moved to the Client Computing Group (CCG).

One of Intel’s strategic strengths is the CCG, which is also a significant weakness. New business areas struggle to reach a comparable revenue size and are often booted before making it to the big league.

In 2018, I reviewed Intel’s three growth horizons, and as can be seen, the two growth areas that should have driven the next generation of Intel growth have both been sold.

The divisional structure is competitive. The divisions fight for resources and attention, and I have often experienced that internal competition is much fiercer than external competition.

The CCG division is powerful—immensely powerful. I am sure that even Pat and his C-suite have suitable respect for CCG, as it accounts for 58% of the revenue and 9/10ths of the profits.

While I am sure Pat Gelsinger has said it before, the concept of the x86 franchise being the top priority, given the most recent divisional changes, looks like the outcome of a power struggle. Everybody knows that the CCG is where divisions go to die.

Automotive is now a dead man walking inside Intel.

That I am not exaggerating was confirmed by an Intel press release sent out of necessity three days after the divisional changes:

“Intel has an unwavering focus on value creation and are excited about the future of its business. We currently do not have any plans to divest a majority interest in the company.”

Intel did not sell any shares of MobileEye in Q2, and its ownership share is still at 88%. There is still room for selling MobileEye shares while retaining the majority interest, and plans can change in a heartbeat, as we know.

From what I have collected from the last few weeks of Intel chatter, this is what the new strategy looks like. This is entirely my view, and it is simplified as it is a strategic review - not a technical one. Other people than me do that better.