Intel's Next Big Leap: AI Chips and Cost-Cutting for Long-Term Gains

Despite missing profitability targets in Q2 and facing ongoing margin pressure, Intel’s (INTC) strategic investments in AI CPUs, including the highly anticipated Panther Lake CPU built on the Intel 18A process, position the company for significant performance gains and enhanced competitiveness.

Intel is at the forefront of a new computing era, riding the wave of AI-powered PCs set to revolutionize the market. With AI PCs expected to grow from niche to mainstream by 2026, Intel’s cutting-edge chips, including the Lunar Lake series, position the company to seize a significant slice of this booming sector.

Meanwhile, there have been reports that Intel is finalizing an agreement with the U.S. government to get $8.5 billion in direct funding under the CHIPS and Science Act for domestic semiconductor manufacturing, including facilities in such U.S. states as Arizona, New Mexico, Ohio, and Oregon. This will be a huge investment for Intel to grow and update its facilities. However, the company remains dogged by operational headwinds, including shrinking margins and fierce competition from industry behemoths such as Taiwan Semiconductor Manufacturing (TSM).

Speculation of potential investments and acquisitions further complicates the situation. Reports have surfaced that the private equity firm Apollo Global Management has proposed an investment of up to $5 billion in Intel, while Qualcomm (QCOM) is contemplating a complete takeover of the company. Intel has also rejected Arm Holdings's interest in purchasing its product division. While these moves indicate serious interest in some of Intel's components that could be divested for sale, many analysts remain skeptical about whether such investments in Intel would address its core problems. 

Finally, Intel's strategic decisions, such as potentially separating the product division of chips from manufacturing and partly selling its stake in the programmable chip unit Altera, are part of a broader restructuring effort to regain competitiveness in the rapidly changing semiconductor landscape.

Intel’s Q2 Profit Miss: Short-Term Pain, Long-Term Gain?

With Q2 2024 profitability coming in under the consensus, many questioned whether Intel was well-set financially. After achieving milestones in its product and process roadmap, net income did not turn out as expected. This surprise shortfall partly concerns a decision to accelerate core Ultra AI CPUs more quickly. While this move is quite strategic and long-term-oriented, it tended to have a much stronger overrun on near-term profitability, evidence of tension between advancement and short-term financial marks. 

Besides that, the urgency of improving profitability by an additional $10 billion in 2025 makes it compelling to cut costs and enhance efficiency aggressively. The aggressive cost-cutting may reveal operational inefficiency that could drag on the growth of Intel’s value in the near term.

Moreover, sequential revenue growth in Q2 2024 realizes Intel’s forecast but masks deeper-seated problems. The timing of the new export control restrictions in May brought unwanted pressure, vividly showing Intel’s vulnerability to independent geopolitical factors. A modest revenue growth suggests that Intel has to put in more effort to achieve successful sales in a highly competitive market. 

Finally, slower-than-expected recovery is forecast for Q3, underlining this weakness. Then again, below-target performance is present in significant business units, such as DCAI, NEX, Altera, and Mobileye. Thus, despite the challenges within the industry, the fact that it hasn’t added significant gains in market share indicates the inability to use its positioning in such a competitive landscape.

Source: Intel Presentation

Lunar Lake and Strategic Partnerships Propel Growth Amid Rising Demand

Besides the Panther Lake CPU in H2 2025 (designed for the AI PC market), the successor Lunar Lake CPU, with an improved graphics performance of 50% and a full-featured power efficiency of 40%, will be necessary for the company in this space. Intel claims to have already shipped over 15 million AI PCs since December 2023, and cumulative shipments are expected to surpass the 100 million unit milestone by the end of 2025.

Intel is also increasing production to meet the growing demand for AI PCs, with additional products like Arrow Lake and Lunar Lake in the pipeline. Collaborations with Microsoft (MSFT), including powering over 80 new Copilot+ PCs with Lunar Lake, further support Intel’s AI growth strategy. Gartner projects a 33% YoY increase in AI chip revenue for 2024, and by 2026, all enterprise PCs may be AI-powered, a trend that could provide significant upside for Intel’s Client Computing Group (CCG).

Source: canalys

Intel is well-positioned to return to growth through the AI PC market, driven by solid shipment momentum and strategic advancements. With Intel Core Ultra shipments doubling in Q2 2024 and a target of over 40 million AI PCs by year-end, Intel is tapping into the growing demand for AI-enabled devices. 

Additionally, launching the Lunar Lake chip series further strengthens Intel’s position in the premium notebook category, offering significant performance improvements over its predecessors. As AI PC prices drop, with affordable models expected to surpass premium units in volume by Q4 2024, Intel can capture a broader consumer base. 

Overall, Intel’s focus on high-end and affordable AI PCs, combined with growing market demand, supports its potential for long-term growth in this sector.

Intel’s Innovation Milestones: Panther Lake and AI Push Propel Growth

On the positive side, the company has achieved remarkable milestone progress in product and process roadmaps. This is evident in ramping core Ultra AI CPUs and the upcoming launch of Panther Lake, its first client CPU on Intel 18A. The new CPU will likely increase performance and cost competitiveness, which may help improve profitability. 

Additionally, Intel has made strategic investments in the AI PC category for high market penetration targeted in 2026. This may also indicate that Intel has focused on long-term growth. New technologies like RibbonFet and PowerVia in the latest processors also reflect Intel’s push for innovation.

According to the IT leader, Arne Helgesen, Intel’s new Ultra AI CPUs, notably Panther Lake, are set to double AI processing speed, addressing the surge in AI-driven computing needs. By integrating advanced technologies like RibbonFET and PowerVia in its 18A process, Intel can pack more transistors onto chips, improving efficiency and power. These innovations allow Intel to regain technological leadership in chipmaking, enabling faster, more efficient AI applications.

Besides that, Intel achieved several milestones in the foundry business, developing Intel 18A to restore its lead-in process technology. Intel is now making strategic investments in its global footprint and partnerships with the ecosystem players, including Ansys (ANSS), Synopsys (SNPS), and Cadence (CDNS), which will further help solidify its leadership in leading-edge packaging technologies. 

Finally, Intel’s strategy to offer these cutting-edge chips to other companies diversifies its revenue streams, positioning it to command higher prices and expand market share in the rapidly growing AI market.

Near-Term Sacrifices for Long-Term Gains with Panther Lake and Aggressive Cost-Cutting

Its bet on the AI PC segment, set to balloon from less than 10% of the total market today to more than 50% by 2026, led to near-term sacrifices. Long-term, possibly lucrative investments make gains weighted lighter presently.

Secondly, the launch of Panther Lake in 2025 is a crucial driver for Intel’s future growth, but its impact on financials is still a bit distant. As a result, Intel’s margins remain constrained in the near term. This, in turn, places the company in a position where its financial health has to support its long-term strategic ambitions. 

Intel also has a cost-reduction plan that will further contribute to an improvement in the company’s performance. The substantial cost cuts will increase Intel's profitability and efficiency as it maps savings of more than $10 billion by 2025. Operating expenses are expected to decrease to $20 billion in 2024 and $17.5 billion in 2025, down over 20%. 

Finally, Intel plans to cut its gross CapEx to $25-$27 billion in 2024 and $20-$23 billion in 2025. These savings align with a rebuilding plan that involves a 15% headcount reduction by 2025. Hence, the result is that Intel will be leaner and, therefore, better positioned to support long-term growth.

source: Intel

Takeaway

Intel’s strategic focus enables the company to position itself for long-term growth with AI and next-generation technologies. However, profitability might remain nearer term. With aggressive cost-cutting, further innovation in AI CPUs such as the Panther Lake and Lunar Lake series, and growing market share in AI-enhanced PC segments, Intel can benefit from this sharp rise in demand for AI-influenced computing. Some of the near-term issues remain, but their roadmap is defined and aligned with future success in this competitive market.