Intel, the once-dominant designer, and manufacturer of microprocessors, has been losing ground to competitors. Versus three years ago, the stock price of Intel is flat, while the S&P 500 Index is up +37% and the tech-heavy Nasdaq index is up +76%. 2020 was really bad, with Intel’s stock price down -17% and competitors Nvidia and AMD were up +119% and +88% respectively.
For decades, the company has focused on designing and manufacturing specific products that would generate large volumes. In particular, Intel has over-relied on its x86 microprocessors for PC’s and servers. That strategy, in recent years, has been totally defensive; designed to maintain their lead in the face of rapidly advancing trends. Stepping back, there are three core problems at Intel:
- ARM Holdings Has Changed the Industry Business Model – This custom-chip leader isn’t a manufacturer, but a chip designer with technology in almost every mobile device, and more and more notebooks, desktop computers and cloud servers. This Cambridge, U.K – based company licenses its microchip blueprints to tech companies and hardware start-ups alike, more than 500 in all. These licensees use the ARM tools to design their own chips that are uniquely tailored to the task at hand. The resulting designs are then sent to a chip manufacturer such at the Taiwan Semiconductor Manufacturing Corporation (TSMC) or Samsung to be produced. This is fast emerging as the new business model in the chip industry.
- Intel is Stuck in the Past and Is Losing Customers– As noted above, Intel’s business model has been and continues to be designing chips that are primarily used for running servers and PC’s, then manufacturing those chips in its own chip foundries. There is no customization for a particular task a customer may have. That problem has led to the recent Apple announcement to end its use of Intel chips in Macs. Apple is switching to processors of its own design. This was followed by Microsoft announcing that it will be designing its own chips in the future for the Windows operating system. Both companies want to take advantage of the customization that can lead to big efficiencies, better performance for their specific task, power saving, and total control of the process.
- Intel Manufacturing Has Faltered – Back in 2015, the most advanced chip in production at Intel was a 14-nanometer design, the 14-nanometers being a measurement of how close together the transistors are. Packing the transistors closer gives you more power/capabilities per a given size chip. In 2017 to 2019, Intel struggled to make a 10-nano chip but finally did it in mid-2019. They now are targeting for a 7-nano chip in late 2022. TSMC launched their 7-nano chip in 2016 and Samsung did in 2018. In fact, TSMC will be rolling out its 5-nano chip in late 2021.
Clearly Intel has lost its edge in both chip design and manufacturing. Now, it has gotten a major wake-up call with the latest announcements by Apple and Microsoft. While Intel sat back for years and enjoyed its dominance, it is beginning to realize that the industry is well on its way to a new business model.
Intel has a lot of revenue momentum and will not take a big nosedive immediately, but they need a new plan for the future. Net, we have yet another example of a great company getting seduced by success!