On Thursday, Intel reported their second quarter earnings, and the market was not happy. The stock has dropped 26% since the earnings call. The largest drop since 1982.
Investors didn't like a few things about the report.
1. Intel's revenue, gross margin, and earnings per share (EPS) were below the guidance they gave last quarter. Intel said they would do $12.5 - $13.5 billion in revenue, have a non-GAAP gross margin of 43.5%, and EPS of $0.10. They instead generated $12.8 billion in revenue, had a non-GAAP gross margin of 38.7%, and EPS of $0.02. I believe the market was ok with the revenue number because it was still in range, and Intel had received a notice from the Commerce Department in May revoking their license to sell certain products to one of their Chinese customers. So they should have expected revenues to be lower than the forecasted amount. The main shocker was their low gross margin. AMD's gross margin is 49%, and TSMC's is 53%. Investors want to see Intel's gross margin move up, not down.
2. Intel suspended their dividend for the fourth quarter.
3. Intel will lay off 15% (~18,700) of their employees. This will hurt company morale, and people are questioning how Intel will accomplish their aggressive goals with such a reduced workforce. Also, for the company to cut so many employees, investors are wondering if things are worse than Intel is letting on.
Many people believe Intel does not stand a chance, and the CEO should step down. My question to critics is, what is their plan? Instead of complaining about the CEO and the company's direction, let us know what plan Intel should follow to become successful again. One thing I don't like is when people complain and fault find, but they have no tangible solution.
Below is my strategy for the company. It might not be perfect, but it's a plan.
Cut Salaries for C-Suite Managers and Board Members
Laying off 15% of the workforce will hurt company morale, and make people leave before it's their turn at the guillotine. To retain the best talent, Intel should cut the salaries and bonuses of the C-Suite managers and Board Members. Doing this will show employees that their bosses are making sacrifices with everyone else.
Become Nimble
By next year, Intel said they will reduce their expenses by $10 billion by cutting their CapEx, operational expenses, and cost of sales. Whatever can be automated, outsourced, or done with AI, Intel should embrace and incorporate into their business. They should strive to become the nimblest fab company in the world.
The situation reminds me of when Elon Musk took over Twitter, and he fired a lot of people. Everyone thought Twitter would implode, but Elon made the company more efficient. Soon after, other tech companies followed Elon's method and laid off thousands of their employees so they could become more efficient.
Settle the Lawsuit with R2 Semiconductor
I don't hear people talk about the big lawsuit R2 Semiconductor (R2) has against Intel. R2 claims Intel infringed on their patent, and they are winning some of their cases.
R2 is majority owned by Dan Loeb's Third Point and the lawsuit is funded by TRGP Capital. For Dan Loeb to push this lawsuit makes me believe R2 has a strong case, because Dan Loeb is a well-respected investor, and I don't see him pursuing frivolous cases against a major company like Intel.
R2 is also suing Dell, HP, HPE, and Amazon Web Services because they are using Intel products with R2's IP in them. I wouldn't be surprised if this litigation is making customers reluctant to do business with Intel. Who wants to walk into a lawsuit with a shrewd, well-funded plaintiff like Dan Loeb? Customers would rather deal with AMD instead.
The case is discussed on page 23 of Intel's 10-Q.
Here is the letter Third Point sent to their investors about the case. Letter
According to what Intel wrote in their 10-Q, they are negotiating a settlement with R2, and they've already booked a $780 million expense on their Income Statement.
Intel should settle this lawsuit and remove the cloud that's hanging over their business.
Get More Money from the US Government
Once Intel starts producing chips for outside customers, they should ask the government for more money or tax breaks. This money will reduce Intel's cost basis and make it possible for them to charge customers a lower price than TSMC and Samsung. These subsidies should last one or two years so Intel can get on their feet and compete effectively against TSMC and Samsung.
I know people will balk at this strategy because they believe American companies should stand on their own, but the reality is, other countries are not letting their companies stand on their own. They are subsidizing their national champions. TSMC and Samsung have received a lot of help from their governments to get where they're at today.
If America wants to have a national champion, they should do everything possible to help their contender win.
Stop Giving Guidance
Pat Gelsinger should stop giving guidance. He should acknowledge the fluidity of Intel's situation and tell Wall Street that he won't give anymore guidance. Talking about the next quarter is unwise because there are too many moving pieces in Intel's business right now, plus, America is battling China, so there's no telling what new law America will announce to stifle Intel's business with the country.
It's better for Pat to stop guiding each quarter, because when he does it, he gets things wrong, and people start losing faith in his predictions.
Final Thoughts
Intel should keep moving forward with their plans. They just need to outlast the negative sentiment that surrounds them.
Their situation reminds me of Donald Trump. He was facing a lot of serious cases, he spent a lot of money on attorneys and judgments, he got convicted and then shot, but he kept on moving forward, and by staying in the race, he was able to outlast his opponent, and the adversity that surrounded him.
Intel just needs to stay in the race. Soon, the company will be firing on all cylinders, and the controversies will be behind them.
I wouldn't be surprised if short sellers start piling into the stock. If enough short sellers jump in and Intel starts printing good numbers, a short squeeze might be on the horizon. I will keep my eye on Intel's short ratio, which is currently 2.2%.
Although the stock has dropped 56% since I bought it, I feel calm as a summer breeze. I guess I was born with diamond hands.
If you have a plan that Intel should follow, don't hesitate to email me so we can discuss it. ov@myinvestmentdreams.com
Stay strong, stay blessed, and God willing, I will see you next week.
We give great honor to those who endure under suffering. For instance, you know about Job, a man of great endurance. You can see how the Lord was kind to him at the end, for the Lord is full of tenderness and mercy.
James 5:11 NLT
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