Increased Competition In The Consumer And Commercial CPU Markets Will Impact Top Line Growth

Intel lands itself in hot water

• Intel has come under fire recently for a series of shortcomings and ‘failures to act’. Tech YouTuber, Gamers Nexus, has covered the Intel case in great detail and much of the information in my update was learned from their video.
• Following a series of disappointing earnings calls, Intel announced a $10 billion cost reduction scheme to try and pull the profitability lever. It’s surprising that in an AI ‘bubble’ like the one we’re in now, Intel has managed to miss the mark as spectacularly as it has, considering its market-leading position.
• Intel announced it needed to “chop some wood” which is a pretty distasteful euphemism for “cutting nearly 15% of Intel’s workforce”. While the extent of the layoffs haven’t been detailed further, it’s estimated that 12,000 non-fab positions and 3,000 manufacturing positions will face the chopping block. In another hit to employee morale, it seems that an internal memo detailed some unfavorable changes to employee leave, as well as a reduction in corporate services for gym and travel.
• Perhaps more concerning for investors is the announcement that Intel is suspending its dividend for the fourth quarter. A move which may be necessary, but very unpopular with the market, contributing to a 26% drop in the company’s share price.
• If we look back to last year, Pat Gelsinger, Intel CEO, received a 45% rise in total compensation from $11.61 million in 2022 to $16.86 million in 2023. It’ll be interesting to see if this remuneration is clawed back in response to cost-cutting measures.

The manufacturing issue - Via Oxidation

• Besides Intel’s absyssmal market performance, they have also been under fire for issues they’re having with their latest consumer CPU series.
• In late 2022, Intel became aware of a manufacturing defect that is being labeled as the ‘Via Oxidation’ issue. The issue is a defect in the CPU chip that causes significant instability in operation. This is a terminal issue for impacted chips and this isn’t something that can be fixed with any microcode updates. Impacted CPUs will slowly die off and the only remedy is for impacted customers to make an RMA claim for a defective chip. However, this is where things get difficult.
• Intel have not been transparent about which CPUs have been impacted by the manufacturing issue. The issue was first observed in late 2022 and Intel claims to have fixed it in early 2023. Concerningly, according to Gamers Nexus, it appears that Intel were aware of this issue well before informing retailers, and thus knowingly shipped out inventory with higher defect rates. Since their initial comments, Intel has now said that that the issue may still be present in hardware currently sitting on the shelves of retailing partners in 2024.
• To make matters worse, Intel have been tight lipped about the batch numbers impacted by the issue - something they’d be very aware of. So what was originally communicated as a ‘small issue, quickly fixed in early 2023’ now seems to be much larger. Why else wouldn’t Intel share the impacted batch numbers, unless the true extent of the defect is much larger than anyone thinks?

“Danger! High Voltage” - The Voltage/Instability Issue

• Completely separate from the previous manufacturing issue, is a persistent instability issue impacting Intel 13th and 14th Gen processors. The instability issue was initially reported in Feb, when Intel mentioned it was investigating excessive crashing and blue screens with 13th and 14th Gen ‘unlocked desktop processors’. Originally, it was thought that the issue was exclusive to Intel’s 13900K and 14900K flagship chips. However, as things developed, it became apparent that the issue was impacting all 13th and 14th Gen intel processors with a 65W or higher base power. This is a staggering 30/43 or 70% of all CPUs in Intel’s Gen 13 and 14 Intel Desktop processors. 
• The issue itself seems to have been related to the microcode pushed to Intel chips several years ago. The issue meant that the processor was allowed to enter a higher performance state (read: more voltage) despite being at a higher operating temperature than was acceptable to do so (Enhanced Thermal Velocity Boost).
• The issue manifested itself in repeated crashes for users running Intel 13th and 14th Gen CPUs. The issue was particularly bad for gamers playing Unreal Engine 5 games.
• Now, Intel has pushed a fix to the microcode to fix the issue, but if CPUs that had issues prior to the fix are more than likely IRREPARABLY DAMAGED.
• In response to the spate of issues Intel has been having and their ‘failures to act’, there are now a series of class action lawsuits that may be brought against Intel to compensate impacted customers.

My Take

• The last month or two has been a disaster for Intel, and possibly some of the worst few months I’ve seen a company face in the last few years that haven’t been related to COVID-19 or illegal activities.
• I have been bearish on Intel for some time, and this latest news further reinforces my position. Funnily enough, the massive price drop now means my fair value is undervalued.
• I am going to drop my Client Computing forecasts from 7% annual growth to 3% annual growth, expecting these issues will drastically swing consumer sentiment towards AMD. Interestingly, AMD has had some issues of their own with their Ryzen 9000 CPUs, but their decision to delay the release of some SKUs seems to be the much more sensible thing to do. This sees me reduce my 2029 revenue forecast from $43.51 Billion to $35.96 Billion.
• Company-wide revenue falls to $66.59 Billion in 2029 in response to the lower revenue growth rate for the client segment. This is representative of a 3.81% revenue growth per annum for Intel as a whole.
• I believe the company will now be trading on a 22x PE multiple, as investor sentiment will be harmed from the suspension of the dividend and Intel’s reputation will be irreversibly damaged from the way they’ve handled this.
• With the new inputs, my fair value now sits at $19.70.