Intel (INTC) is in the midst of one of the most tumultuous periods in its 56-year history. Falling sales, missed opportunities to compete in the artificial intelligence space, and a massive turnaround effort by CEO Pat Gelsinger seeking to return the company to its former glory are putting significant pressure on the chip giant’s results and stock price.
And things are getting more and more interesting for the company.
Last Monday, Intel announced that it has signed a deal with Amazon (AMZN) to build custom chips for Amazon Web Services, a positive sign for the company’s nascent third-party foundry business.
On Friday, the Wall Street Journal reported that Qualcomm (QCOM) has reached out to Intel for a blockbuster acquisition deal that would give Qualcomm a bigger presence in the PC and artificial intelligence spaces. But that’s not all. On Sunday, Bloomberg reported that Apollo Global Management (APO) has offered to make a multi-million dollar investment in Intel to keep Gelsinger’s turnaround moving forward. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
There’s a lot to keep track of and even more to understand. Luckily, I’m here to help you explain it all.
Intel’s slowing sales and AI issues
Intel is facing declining sales and the unenviable position of having to take on market leader Nvidia in the artificial intelligence space. In 2023, Intel reported annual revenue of $54.2 billion, a 14% year-over-year drop from the $63.1 billion the company reported in 2022.
That included an 8% drop in Intel’s Client Computing Group, which sells PC chips; a 20% drop in Data Center and AI revenue; and a 31% decline in Networking and Edge sales. Intel did, however, report a 103% increase in its Intel Foundry Services, but that amounted to just $952 million.
Part of Intel’s problems stem from the fact that the explosion in PC sales at the start of the pandemic pushed Client Computing Group revenue forward by several quarters, creating a boom and bust. Consumers bought new PCs in droves for work and play, sending chip revenue soaring. But millions of consumers don’t typically buy new PCs at the same time. With so many people owning new computers, fewer consumers were looking to upgrade, and sales went into a prolonged slump that sent shipments into a tailspin for eight straight quarters.
Sales are picking up, though. In July, IDC said the PC market grew 3% in the second quarter, marking a second straight quarter of growth. But the industry still has a long way to go.
At the same time, Intel faces a new threat from Qualcomm, which began offering its Snapdragon X Elite and X Plus chips in Windows PCs earlier this year as an alternative to Intel’s processors. Those chips offer improved performance and power compared with Intel’s previous offerings and are meant to compete with Apple’s (AAPL) exceptional M chip family that powers its MacBooks.
However, Intel is fighting back. Earlier this month, the company unveiled its Core Ultra 200V line of processors that it claims can outperform Qualcomm chips.
The PC sales slump also hit graphics giant Nvidia (NVDA), which saw sales of its gaming graphics chips deteriorate following the pandemic’s surge. But the company, unlike Intel, has been able to leverage its early AI investments to capitalize on the surge in interest sparked by the debut of OpenAI’s ChatGPT in November 2022.
That helped catapult Nvidia to the forefront of the semiconductor industry and sent its stock to extraordinary new heights, rising more than 860% over the past two years and 191% over the past 12 months.
Intel is working to try and catch up to Nvidia with its own line of Gaudi AI accelerators. On Tuesday, the company unveiled its latest Gaudi 3 AI accelerator and announced that IBM will use it as part of its IBM Cloud offering.
But with Gartner estimating that Nvidia controls more than 70% of AI chip sales, it’s an uphill battle.
Intel Foundry Services
Intel is also striving to position itself as a chipmaker for outside customers. The plan is for the company’s foundry business to operate as an Intel subsidiary that makes processors for customers looking for an alternative to TSMC, which is among the world’s largest chipmakers.
But construction is expensive and Wall Street is not entirely sold on the idea. Analysts at Citi Research have said Intel should exit the foundry business altogether in order to improve margins and earnings per share.
However, in September Intel announced a multi-million dollar deal to “produce an AI fabric chip for AWS on Intel 18A, the company’s most advanced process node.” The company also plans to manufacture a custom version of its Xeon 6 chip for Amazon.
The news comes after Intel announced that Microsoft had joined the company as a manufacturing customer in February. Two big-name companies are certainly a start for Intel, but it’s going to have to sign up a lot of customers if it wants to grow its manufacturing segment to match competing chipmakers.
Qualcomm and Apollo
Intel’s troubles with computers and artificial intelligence have made it a potential takeover target, and that’s where Qualcomm and Apollo come in. Qualcomm, according to the Wall Street Journal, wants to buy Intel, though it’s unclear whether the company will keep all of Intel or sell off parts of its business segments. The deal will also raise plenty of antitrust concerns, as the companies are two of the largest chip firms in the United States.
Meanwhile, Apollo appears to favor Gelsinger’s plans and could invest as much as $5 billion in Intel to move the effort forward, Bloomberg reports.
Now investors will have to wait and see whether Intel moves forward with either company or continues to try to go it alone.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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