The Implications of Pat Gelsinger's Retirement on Intel's Shares
The Implications of Pat Gelsinger's Retirement on Intel's Shares
Intel (INTC, down 1.16%) is about to embark on a new chapter in its history following the unexpected retirement of CEO Pat Gelsinger. Gelsinger spent the majority of his career at Intel, contributing significantly to the creation of the i486 microprocessor in the '80s. He was mentored by Intel co-founder Andrew Grove before moving on to other ventures.
The company's board had high expectations for Gelsinger's return, hoping it would help Intel regain its former prominence. However, with Gelsinger's retirement, those expectations have been shattered. David Zinsner and Michelle Johnston Holthaus will assume the role of interim co-CEOs until a suitable replacement is found. However, the more pressing concern for Intel is how Gelsinger's departure affects the semiconductor stock and its shareholders.
Gelsinger's Departure
In the end, Gelsinger leaves a complex legacy behind at Intel. He returned to the company in 2021 when Intel had fallen behind competitors like Advanced Micro Devices and Nvidia. Even Taiwan Semiconductor surpassed Intel's manufacturing capabilities.
As CEO, Gelsinger aimed to restore Intel's industry leadership. He set a plan to catch up with rivals by this year and surpass them by 2025. He wanted Intel to lead the foundry industry, allocating billions of dollars to build the world's most advanced fabs in the US and abroad.
Regardless, the emergence of Nvidia's AI accelerators dashed hopes of regaining industry leadership. Furthermore, the massive costs of building foundries led to financial losses, the suspension of Intel's dividend, and its removal from the Dow 30. These results made Gelsinger's tenure unsuccessful from a shareholder perspective.
Intel Post-Gelsinger
Gelsinger's departure only adds to the uncertainty. Both interim CEOs have financial backgrounds. Despite their temporary stint, Intel may need more engineering-focused leaders to increase its competitiveness.
Regardless of the next CEO, Intel's business direction is in flux. Despite losing its technical edge, Intel's product revenue alone reached almost $36 billion in the first nine months of 2024. Preserving that revenue stream might be sufficient for the company to invest in technical improvements.
Moreover, Intel has already made Intel Foundry a separate subsidiary. Its revenue in the first three quarters of 2024 was $13 billion, significantly less than its product revenue. However, as the largest foundry company in the US, Intel is under intense political pressure to catch up with TSMC. This pressure could push Intel to spin off the foundry business into a separate company.
Furthermore, Gelsinger's business decisions had a significant impact on the financials. The revenue of $39 billion (including intersegment elimination) in the first three quarters of 2024 did not significantly increase from last year's levels.
Despite this, the cost of revenue rose 12% during that time due to rising depreciation costs. Additionally, around $7 billion in restructuring charges contributed to a staggering $19 billion net loss in the first nine months of 2024. Compared to the less than $1 billion loss in the same period last year.
Consequently, Intel's stock has suffered under these conditions. However, its price-to-sales (P/S) ratio of 1.8 is near multiyear lows. Its price-to-book value ratio is around 1.0, pricing the stock at the value of its assets minus its liabilities, a rock-bottom valuation that provides investors with a reason to take a chance on this troubled stock.
Investing in Intel
Until investors gain more clarity on Intel's future direction, they should likely treat its stock as a speculative hold. The instability at the top of the company, the lack of a technical edge, and the uncertain direction of the company may prevent most investors from investing in the stock.
However, a 1.0 price-to-book ratio likely limits its potential downside. If Intel can regain competitiveness and fully spin off its foundry business, either part or both could eventually bring significant returns to its investors.
In conclusion, such hopes are currently speculative. Until Intel can restore stability and forge a viable growth path, investors should anticipate little from this company.
In the context of Intel's post-Gelsinger era, the interim co-CEOs' financial backgrounds might be crucial in navigating the company's financial challenges. However, some argue that Intel might require more engineering-focused leaders to boost its competitiveness.
As Intel grapples with pressure to catch up with TSMC and maintain its revenue stream, its decision to spin off the foundry business into a separate company could potentially impact its investors. Despite its troubled financial performance and staggering net loss, Intel's stock offers a low price-to-sales (P/S) ratio and price-to-book value ratio, making it an appealing option for investors seeking a low-risk investment opportunity.