Sarah Brady
Updated on: October 13, 2024 2:03 pm GMT
Intel Corp. is at a pivotal crossroads, pursuing a recovery strategy aimed at reversing billions in losses and addressing a struggling stock price. With recent announcements from CEO Pat Gelsinger, the company is taking bold steps toward transforming its business model, leading to a significant restructuring of its chipmaking operations.
Bold Moves Amidst Weak Returns
For investors and technology enthusiasts, Intel’s journey has been rocky. The company’s return on capital employed (ROCE) stands at a low 0.3%, a sharp decline from 20% just five years ago. This current figure is not only disappointing for shareholders but also significantly underperforms the semiconductor industry average of 9.0%.
The calculation of ROCE provides insight into a company’s profitability. For Intel, the figure was derived using the formula Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities), leading to the revealing statistic of:
- Earnings: US$509 million
- Total Assets: US$206 billion
- Current Liabilities: US$32 billion
Such statistics raise questions about Intel’s future potential, especially as it clawed back slightly to an ROCE of 0.3% from the previous year. Analysts worry that despite a strategic shift towards reinvestment, Intel’s sales figures have stagnated over the past year.
Restructuring the Chipmaking Business
Intel’s recovery plan involves spinning off its chipmaking business into an independent subsidiary known as the Intel Foundry. This shift aims to enhance operational efficiency and create a clearer separation from the parent company. Key features of this restructuring include:
- Independent Operations: The Intel Foundry will have its own operating board, allowing it to report financial earnings separately.
- Halting New Facilities: Intel has paused construction on its factories in Poland and Germany for two years, citing uncertain market demand. However, investments in facilities located in Arizona, Oregon, New Mexico, and Ohio will continue unabated.
These changes are a direct response to the company’s dwindling revenue and mounting operational losses. With chipmaking losses totaling $7 billion in 2023 alone, the stakes are high.
Acquisition and Expansion Plans
In conjunction with the restructuring, Intel announced plans to sell part of its stake in Altera, a programmable chip company acquired in 2015, to generate additional expected revenue. Furthermore, the company will be trimming approximately two-thirds of its global real estate footprint, a significant move aimed at reducing overhead costs.
In a boost to their operations, Intel revealed that it has secured up to $3 billion in funding from the Biden administration. This funding is designated for producing chips specifically for the U.S. military, further demonstrating the company’s role in national security while providing financial support amid its restructuring efforts.
The Road Ahead
Despite these strategic decisions, challenges remain for Intel as it strives to regain its foothold in the semiconductor industry. The recent announcement of layoffs affecting 15,000 workers has been alarming, yet it is viewed as necessary to realign the company during this transitional phase.
“We are more than halfway to our goal,” stated Gelsinger during an update. “This is the most significant transformation of Intel in over four decades. Not since the memory to microprocessor transition have we attempted something so essential.”
Even with new production techniques on the horizon, such as the upcoming 18A chipmaking process planned for production next year, analysts are cautious. Early reports indicate that initial testing has faced obstacles, especially in creating silicon wafers for partners like Broadcom.
Looking for Growth
As Intel invests back into its operations for long-term growth, the market remains skeptical. Given that Intel’s stock has depreciated by over 51% in the past five years, investors are right to examine these trends closely.
- Increasing Capital Employed: Intel’s decision to reinvest itself is a promising signal. However, stagnant sales remain a concern.
- Market Reaction: Ongoing losses and workforce reductions have cast doubt on investor confidence in the company’s future trajectory.
While some maintain that Intel has the potential to rebound, others believe there are more promising investment opportunities elsewhere. For now, the company’s future hinges on its ability to transform its core business effectively.
Conclusion
Intel is undoubtedly at a critical juncture as it works to recover from financial setbacks and shift its operational strategies. While the company’s reorganization efforts and partnerships may bear fruit in the longer term, uncertainty continues to loom. With a renewed focus on its chipmaking business and large-scale transformations underway, observers will be watching closely to see if Intel can navigate through its current challenges and emerge as a leader once again in semiconductor manufacturing.
In the fast-changing world of technology, companies need to keep up quickly. Intel’s choices will shape what happens next for them. It’s a mix of taking chances, making changes, and finding new opportunities.
