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After decades as the king of PC chips, Intel has struggled for the past few years watching rivals Advanced Micro Devices and Nvidia leap ahead with better performing processors.
But investors are already anticipating that Intel’s troubles may be in the rearview mirror. In the two months since the company announced that VMware CEO Pat Gelsinger, who had worked at Intel for 30 years, would be its next leader, its stock price has leaped 23%.
Now Gelsinger must deliver.
On Tuesday evening after the stock market closes, the new CEO will deliver his first strategy address and take questions from analysts. It’s being billed as “Intel Unleashed: Engineering the Future,” with Gelsinger planning to explain his vision for “the new era of innovation and technology leadership at Intel.”
“It takes a long time for a new CEO to impact the product road map, but Gelsinger’s credibility can buy time,” Morgan Stanley analyst Joseph Moore noted last week. Gelsinger is already generating much needed energy within the company, Moore adds. “We appreciate having that enthusiasm internally—and a CEO who can sell that vision to the engineering workforce, the data center community, and to ecosystem partners.”
An electrical engineer who started at Intel before he even graduated from college, Gelsinger appears to have the deep knowledge of his industry to match rival CEOs Lisa Su at AMD and Jensen Huang at Nvidia. But Gelsinger will have to thread a careful path in explaining his comeback strategy after his two immediate predecessors, Bob Swan and Brian Krzanich, departed after overpromising and underdelivering on chip improvements.
Unlike its main rivals, AMD and Nvidia, Intel not only designs chips but manufactures them too. Its biggest problem has been that the once reliable silicon chip manufacturing improvements that made its processors leap ahead in performance every two years or so, the trend identified by Intel cofounder Gordon Moore as Moore’s Law, haven’t arrived on schedule. A brand-new series of chips for PCs that Intel unveiled this month is being built with the same basic manufacturing technique that the company debuted in 2015.
Gelsinger can’t fix the manufacturing problems overnight, and he may have to rely on outsourcing some chipmaking to bitter rival Taiwan Semiconductor Manufacturing Company, a stopgap strategy that prior CEO Swan set in motion. TSMC has been clocking regular manufacturing improvements, passing Intel by, and is now the leading manufacturer for AMD, Apple, and many others.
Some of the more bullish analysts are already anticipating a home run from Gelsinger, who was a top lieutenant to Intel’s legendary fiery and successful CEO Andy Grove before leaving for VMware parent EMC in 2009.
Gelsinger’s updates should include positive news on the company’s delayed next manufacturing advance, known as 7 nanometer, and a clearer explanation of how much business Intel plans to outsource to Taiwan Semiconductor, UBS analyst Timothy Arcuri noted on Monday. Gelsinger could also offer a long-term vision about how Intel will better compete for future computing demands related to artificial intelligence and machine learning. “We nonetheless see these as the first steps in a multiyear journey which should yield considerable upside for this stock,” Arcuri wrote.
But more cautious analysts like Stacy Rasgon at Bernstein Research aren’t sure Gelsinger can make any quick changes to boost Intel’s competitive position in an industry in which new chip designs can take three to five years to reach market. “There is not much Intel can do to substantially alter the product trajectory over the next several years,” Rasgon noted on Monday. Apple has already dumped Intel chips from its Mac computers for chips based on a design by British chip company Arm, and Amazon is likewise producing an in-house chip based on Arm for new servers, Rasgon added.
Arm is an “underappreciated threat,” Bank of America analyst Vivek Arya agreed in a note last month. It’s not just Apple’s defection but the likelihood that cloud servers at Amazon, Google, and other companies will also shift to cheaper, in-house chips based on Arm. Google just hired longtime Intel exec Uri Frank to head its custom chipmaking push. Meanwhile Nvidia is trying to buy Arm and integrate its designs more closely, though it has run into antitrust objections.
The bottom line? Intel’s share of the highly profitable server market could drop from more than 90% currently to under 70% in 2025, Arya warned.
Gelsinger will need to be very convincing on Tuesday to fend off more customer defections.