Intel (INTC, Financial) has been in the spotlight following its disappointing Q2 earnings report, which included a top and bottom-line miss, gloomy Q3 guidance, and a massive restructuring plan involving a 15% workforce reduction. Reports have also emerged about potential activist pressures and the possibility of Intel seeking a buyer for its Foundry business.
Over the weekend, it was reported that Intel's CEO Pat Gelsinger will present the company's cost-cutting plan to the board later this month. Contrary to earlier reports, this plan does not include divesting the Foundry operations, which had sparked investor interest last week. Despite the Foundry segment's $2.8 billion operating loss in Q2, Intel is unlikely to sell it off, given the significant investment in time and money, and its unique position compared to pure chip designers like Advanced Micro Devices (AMD, Financial) and NVIDIA (NVDA, Financial), which rely on Taiwan Semiconductor Manufacturing Company (TSM, Financial) for production.
The cost-cutting plan reportedly focuses on other actions to navigate the challenges that have stunted revenue growth and caused substantial losses, from high failure rates of 13th and 14th-generation CPUs to competitive disadvantages in the AI space.
- Intel could sell its non-core assets to avoid divesting its Foundry business. Struggling cyclical businesses like NEX (Network Platforms, IoT, and Connectivity), Altera, and Mobileye have dampened margins in Q2 and underperformed initial forecasts for Q3. Altera is already on track for full operational separation by year-end, with plans for an IPO over the coming years, making it a potential candidate for divestment.
- Throttling factory expansion efforts is another option to control spending. Intel's Ohio plants, delayed by an additional two years, will not start production before 2027. Intel plans to invest over $28 billion in these Ohio plants. Additionally, Intel announced an over €30 billion investment to construct fabs in Europe, including delayed new locations in Germany and Poland. Pausing these plans seems increasingly likely.
Given the high costs associated with Intel's various initiatives, from expanding production capacity to R&D efforts aimed at catching up with AMD in AI, Intel must act swiftly to avoid worst-case scenarios like selling its Foundry business or facing activist investor intervention. While a rapid turnaround appears unlikely, Intel is not entirely out of the AI race and still has the potential to re-establish itself as a leading chip maker. However, any further setbacks could exacerbate its financial woes.
