Fixing Intel Corp. will take time, but replacing a financial-specialist CEO with an experienced engineer chief executive is a good start, analysts said.
Intel announced Jan. 13 that current CEO Robert Swan would step down Feb. 15 in favor of current VMware Inc. CEO Pat Gelsinger, a 30-year Intel veteran who helped lead development projects for 14 major chips and served as Intel's first CTO before leaving the company in 2009. Wall Street cheered the news, with Intel shares closing up almost 7% on Jan. 13 at $56.95.
Gelsinger "has a unique combination of engineering acumen and business savvy," wrote Credit Suisse analyst John Pitzer immediately after Intel's announcement.
More importantly, Pitzer said the news changes the investment narrative for Intel, which has struggled with a series of manufacturing delays for smaller chip sizes. The company has continued losing market share to competitors and has lost customers like Apple Inc., which announced in May that it would end a 15-year contract with Intel and design its own chips for Apple laptops and tablets.
 Intel's 11th-generation Core H-35 mobile processor introduced at CES 2021. Source: Intel |
Swan is a solid manager but not the right person to lead the turnaround at a chip-manufacturing company, wrote Susquehanna Financial Group analyst Christopher Rolland, noting a 2% increase in Intel's share price since Swan took over as interim CEO in June 2018, while the SOX semiconductor index rose 116%.
Intel still holds dominant shares of most semiconductor markets, and still held its position as the No. 1 chipmaker in the world in terms of revenue in 2020, according to market researchers IC Insight. But Intel is one of the very few semiconductor companies that manufactures its own chips rather than outsourcing its designs to contract manufacturing companies.
Revenue for companies called integrated device manufacturers that manufacture their own chips like Intel rose 6% in 2020, as compared to 22% growth for "fabless" chip companies that outsource production, according to a Dec. 23 ICInsights' report comparing the two categories.
A Nov. 23 ICInsights report projected Intel would finish 2020 with revenue growth of 4%, compared to 50% growth for NVIDIA Corp. and 41% for Advanced Micro Devices Inc. The report estimated 2020 revenue for the 15 largest semiconductor makers.
Intel's market share losses and customer losses in 2020 illustrate the deterioration of Intel's ability to design and manufacture chips at a level no one else, said Stacy Rasgon, managing director and senior analyst at Sanford C. Bernstein & Co. LLC. Competitors that once had no hope of catching up to Intel five years ago are now far ahead, shipping products with 7nm chips when Intel was still struggling to shrink from 14nm to 10nm, Rasgon said.
There is no evidence that a chip company that makes its own chips cannot be as profitable as a fabless company, according to Linley Gwennap, president and principal analyst at the Linley Group, a research firm focused on the semiconductor industry. Inventing a new manufacturing process every time a chip design changes or shrinks to a smaller size is difficult and very expensive, but there is also strong support in the business and among federal agencies to encourage U.S. based semiconductor companies to increase their ability to manufacture chips, especially in the U.S., Gwennap said.
But shareholders want the issue resolved. A demand to Intel from hedge fund Third Point asked Swan to consider alternatives, including the possibility that Intel would sell its fabrication plants and let other companies do fabrication, as its competitors have done.
As CEO, Gelsinger will have the advantage of a solid engineering background, a good track record running large businesses and enough credibility within the company for a new direction, according to James Sanders, semiconductor market analyst at 451 Research, a division of S&P Global Market Intelligence.
"This is a homecoming for [Gelsinger] personally, and comes at a pivotal time for Intel given the headwinds it is facing," Sanders said.
The 451 analyst noted that while there are "immediate, bread-and-butter questions to answer about getting 10nm volume up across the portfolio, getting 7nm out reasonably on time and planning for 5nm designs," there are also more forward-looking questions for Gelsinger to answer about Intel's future, especially in regards to ARM, a competing standard of chips that has gained popularity in recent years.
Apple, for instance, is using highly customized ARM processors for its laptops, putting pressure on Intel in mobile computing market, just as Amazon.com Inc., Microsoft Corp. and NVIDIA are using ARM designs to pressure Intel in data centers.
"It's not inconceivable that Intel would re-enter the ARM market under Gelsinger," Sanders said.