Why Intel is in turnaround mode

·Anchor, Editor-at-Large
·4-min read

Chip giant Intel is in turnaround mode under CEO Pat Gelsinger, who is about eight months into the top job (one he has said is his dream job) at a company he started at when he was 18. 

As for why the storied 53-year-old chipmaker founded by tech titans Robert Noyce and Gordon Moore — which has long been seen as a leader in semiconductor making — is in a turnaround, Gelsinger (who returned in February after an 11-year run leading VMWare) points to several factors.

"I think over the decade there were some bad decisions. You know, lack of, I'll say, manic technology focus on the part of the company and more business leadership. Not that they were bad, but they were business leaders, they weren't technology leaders. Some stumbles around the process technology roadmap. Lack of clear leadership in the products. And under-investment in some of the key areas like our manufacturing and capacity," explained Gelsinger at Yahoo Finance's All Markets Summit.

Added Gelsinger, "So all of these sort of accumulated together to get the company to a position that it wasn't a leader. And it didn't have that sense of iconic leadership. The company that puts silicon into Silicon Valley."

Gelsinger — an engineer by training who was mentored by Intel's legendary leader Andy Grove — wasted little time in trying to course correct Intel's future.

In March, Intel quickly committed itself to making chips for other companies in a bid to increase industry capacity and help end the chip shortage. As part of that ambition, Intel recently broke ground on two chip making foundries in Arizona that are projected to cost $20 billion. Intel expects both plants — dubbed Fab 52 and Fab 62 — to be completed by 2024.

Then in July, the supremely energetic Gelsinger outlined a new product roadmap for Intel that he believes will put it back in an industry leadership position by 2025. 

"By 2025, we aren't talking about inching ahead of the competition but having miles between us and the competition," Gelsinger said. 

To be sure, Intel is still feeling the effects — which includes falling behind rivals AMD and Nvidia in key chip technologies — of operational miscues by its prior leaders. 

Intel said last week that third quarter sales came in at $18.1 billion, slightly missing analyst forecasts for $18.24 billion. Sales at Intel's largest business — client computing — dropped 2% from a year ago. Data center sales rose 10% from last year. Autonomous driving tech outfit Mobileye saw sales gain 39%. 

Earnings per share tallied $1.71 compared to projections for $1.11. 

But Intel's outlook spooked investors, and they sent the stock down 11.5% on Friday

Intel told analysts on a conference it sees sales of at least $74 billion in 2022 (relatively in line with analysts). Gross margins are forecast in the 51% to 53% range for the next two to three years as Intel invests aggressively in its business. The Street had been estimating gross margins of 57%.

"We remain constructive on the long-term benefits of Intel’s turnaround efforts, but expect the stock to remain range-bound in the near-term until greater clarity on execution improvements become apparent," said Deutsche Bank analyst Ross Seymore. 

Seymore maintained a Hold rating on Intel's stock. 

Gelsinger acknowledges the skepticism on Wall Street about the pace of Intel's turnaround. But he remains steadfast that Intel is a different company today than when he took over, and that constructive change will only continue in the years to come.

"Intel is back, right. The geek is back. Our role — this deep, passionate view that we're going to deliver the best products. They're going to be high quality. We're going to scale them at volume. We're going to satisfy our customers better with them. And each one of these things is gaining momentum in the marketplace. So, you know, I look at our skeptics and I'll say just wait, right, because we're building the evidence base that is going to take the worst of skeptics today and turn them into the most ardent of believers tomorrow," Gelsinger says.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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