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Third Point CEO Daniel Loeb
David Paul Morris/Bloomberg
After a tough year,
Intel
executives received one last 2020 surprise. It came in the form of a sharply worded letter this past week from activist investor Daniel Loeb.
Loeb, CEO of hedge fund Third Point, laid out the need for change at the once pioneering chip maker. And he encapsulated the question many on Wall Street and in Silicon Valley have been asking for more than a year now: How did once-dominant Intel (ticker: INTC) so clearly lose its way?
“We cannot fathom how the boards who presided over Intel’s decline could have permitted management to fritter away the company’s leading market position,” Loeb wrote to Intel Chairman Omar Ishrak. “Stakeholders will no longer tolerate such apparent abdications of duty.”
Intel shares rose 5% on news of Loeb’s letter and a Reuters report that Third Point had a $1 billion stake in the company. The stock was still down 17% in 2020, versus a 51% gain for the PHLX Semiconductor index.
For years, the investing case around Intel has been that its true value lies in a fully-integrated approach to chip making—it designs and manufactures chips, while rivals Advanced Micro Devices (
AMD
) and
Nvidia
(NVDA) rely on third-party manufacturers such as
Taiwan Semiconductor Manufacturing
(TSM) and
Samsung Electronics
(005930.Korea).
But that case assumed Intel could do design and manufacturing equally well. Several years of delays have undermined that claim.
“The loss of manufacturing leadership and other missteps have allowed several semiconductor competitors to leverage TSMC’s and
Samsung’s
process technology prowess and gain significant market share at Intel’s expense,” Loeb wrote.
As Barron’s observed in November, Intel’s troubles can be tied to a decision some 15 years ago, when it opted not to make processors for
Apple’s
(AAPL) iPhone. While the mobile market was small at the time, it has proven to be a massive volume play for Taiwan Semi and
Samsung,
giving them increased scale and practice at making advanced, energy-efficient chips.
Read also:Intel Has Fallen Behind Rivals and the Rest of Tech. Why Its Stock Can Rise Again.
A desire to boost energy efficiency is a major reason Apple decided to design its own Mac chips, which began rolling out to new models in November. These days, consumers are as focused on long battery life as they are on raw performance, and Intel hasn’t been able to keep up. Taiwan Semi is at least a year ahead of Intel on key chip-making technology.
Intel responded to Loeb’s letter with a statement saying that it welcomed input from investors on how to enhance shareholder value, and that “we look forward to engaging with Third Point LLC on their ideas toward that goal.”
Third Point declined to comment beyond its letter, but the firm was clear on where it sees the problem: “Of special concern is Intel’s human capital management problem and the absence of an articulated plan to address it,” Loeb wrote.
In June, high-ranking chip designer Jim Keller left Intel citing personal reasons. The next month, Intel delayed its next-generation chip until late 2022 and announced a shake-up in its engineering team, including the departure of chief engineer Venkata Renduchintala. CEO Bob Swan reorganized the rest of the company’s technology group to report to him.
Swan wasn’t the typical Intel CEO when he was promoted to the top role in January 2019. He comes from a financial background, having served as eBay’s chief financial officer and as a partner at investment firm General Atlantic.
The lack of technical expertise is even more apparent on Intel’s board of directors, which lacks members with chip-making experience. Ishrak, who joined the board in 2017 and became chairman in early 2020, is a longtime medical-technology executive. It’s worth wondering how a more chip-focused board might have guided the company in recent years.
I asked Swan about the board’s makeup in a November interview: “I couldn’t feel better about the diverse makeup of the representation of our board,” he told me, “so we get different thinking around the table to be able to assess the opportunities and the challenges that we have to confront.”
Loeb’s letter was vague in terms of next steps, but the activist noted the possibility of submitting board nominees at Intel’s next annual meeting.
Ultimately, Loeb’s interest aligns with the argument we made in our November story: Intel remains a chip-making heavyweight with considerable underlying value.
While much of Wall Street would like to see Intel focus exclusively on chip design, it doesn’t have to become a fully fabless chip operation like AMD. The company already has shown flexibility when it comes to outsourcing. In late 2019, an Intel executive said that “something like 20% to 25% of the wafer volume that we source comes from outside of the company.”
More flexibility would help. “Intel could materially leverage TSMC (say for 25% to 50% of their needs) in order to restore the competitiveness of their chips,” New Street Research analyst Pierre Ferragu wrote this past week. “This would also create competition for internal manufacturing, which can only do good and help repair Intel’s broken operations.”
While it’s been a difficult year for Intel, the good news is that it won’t take much for executives to give shareholders hope in 2021—just a willingness to put vanity aside and ask for some help.
Write to Max A. Cherney at max.cherney@barrons.com