Intel's missed opportunities

Don't let Intel's stock price fool you - it's not having a great time and unless it undergoes a massive transformation, it's going to be on life support very soon. I held onto its stock for over a decade then early last year I gave up and decided it to dump it all in favor of Nvidia. 

Intel is no longer the unquestioned heartthrob of the $400 billion chip industry. It's far from it; its problems run deep and the last decade has been a tale of many massive missed opportunities.

First, there was the epic Mobile failure. Despite the boom and skyrocketing revenues in the Mobile space for over two decades, Intel got zilch. How did that happen? The short story is that Intel's design was poor - too focused on speed and too dismissive of power management. Intel wasn't even a candidate for the iPhone CPU, and despite years of trying, it couldn’t break into Android either.

Despite this colossal failure, Intel prospered and its stock has risen thanks to the explosion in cloud computing (and hence data centers). It thrived because every major datacenter operator made the x86 the default processor for servers. Intel, due to its proprietary designs and superior manufacturing, made the best x86 processors and reaped most of the benefits (revenues). This should be great, right? 

Well, it's not. The x86 business proved to be so profitable that Intel never felt the financial pain necessary to dramatically transform its business and now it's fighting to survive. Intel's integrated approach - design and manufacturing - is what has given it the edge early on in the x86 race and allowed it to move much faster than everyone else. But it's what's killing Intel now. 

Long ago, when it was clear that Intel lost the mobile battle, it should have split into two companies: one for design and another for manufacturing. Even better, it should have focused on manufacturing as its primary business and outsourced design with the exception of x86. So, keep the x86 design business  without it being its only business and, over time, not even its primary business.

For the life of me, I can't understand why Intel is so hell-bent on remaining a design company and only manufacturing its own mediocre designs. There is no money in design. Much of the work has been more or less commoditized. Know of any mobile chips not centered on the ARM architecture? For the cost of a license fee, Apple and others can create their modifications, and hire a foundry to manufacture the chip.

Manufacturing is extremely rare, and therefore extremely valuable. There are only four foundries: Samsung, GlobalFoundries, TSMC, and Intel. Only four have the capacity to build the chips that are in every mobile device today, and in everything tomorrow. Massive demand, limited suppliers, huge barriers to entry. It doesn't get any better. Right? 

Bottom line, it should be great to be Intel. But it's not.  This is because their (not so) enlightened management sees it as a design company. Intel should have made manufacturing its primary business. It should have invested a big chunk the money it got from x86 in data centers to improve its manufacturing, maintain its edge, and provide it as a service to other chip designers. Instead, it wasted it trying to make its crappy designs work better. Now Intel is struggling to keep up with rivals like TSMC, which focused solely on manufacturing and have rapidly upgraded their processors. 

• Intel's latest chips use a 14-nanometer process, while TSMC is working on downsizing to just 3 nanometers. Sorry Intel, but no combination of design and manufacturing will ever bridge the performance gap between the two chips.
• In the past year, the market capitalization of Nvidia grew past Intel's. Nvidia is in the process of acquiring ARM and as mentioned in a previous article, it will soon dominate the data center business.
• Just a few months ago, Apple said it would drop Intel's chips in favor of ones designed in-house and fabricated by TSMC. Other major Intel customers, including Amazon and Microsoft, have indicated they plan to do the same.

Intel has appointed a new CEO. I don't have high hopes that he'll be able to do much about Intel's dire situation. I think the only thing that can save Intel is Geopolitics. The US government could step in to help Intel improve its manufacturing and catch. Of the four manufacturing foundries, only Intel is American. That's the only thing that will stop Intel from becoming Out-el.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.