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Tencent Technology News, August 11, according to foreign media reports, as the largest chip manufacturer in the United States, the huge scale may provide the necessary guarantee for Intel's survival, but the company is facing an unprecedented crisis. Nevertheless, even if the scale is greatly reduced, Intel may be too big to fail, although its future survival model remains unclear.

Intel's second-quarter earnings report this month triggered a disastrous reaction, revealing the chip giant's unprecedented predicament. Faced with the dual pressures of weak sales in key markets and high costs of manufacturing business transformation, Intel was forced to take more aggressive financial austerity measures to save costs, including laying off 15% of its employees, cutting capital expenditures for building and equipping production facilities, and suspending Intel's dividend payments since 1992.

These moves have investors pulling out. Intel shares plunged more than 25% the day after the earnings report on August 1, and have since fallen another 8%, performing worse than most other chip stocks in the global market sell-off over the past week. Intel shares have fallen about 68% since CEO Pat Gelsinger rejoined Intel in early 2021 and first outlined his transformation plan. In comparison, the S&P 500 has risen 39% over the same period.

What’s particularly striking is that Intel’s current stock price has fallen below its book value for the first time since 1981 (FactSet records), indicating that the market values ​​the world’s top chipmaker at less than the net value of its assets on its balance sheet. Nevertheless, these assets, especially its production facilities, remain the cornerstone of Intel’s long-term competitiveness.

Over the past few years, the pandemic and global instability have made the political leadership of both parties in the United States realize that supporting domestic production (an indispensable cornerstone of modern life) is of vital importance. Given the high threshold and long cycle characteristics of chip manufacturing (it takes several years and costs about $20 billion to build a modern wafer fab), their important position in the global supply chain has become increasingly prominent.

The motivation behind the US government's intervention is obvious. The "CHIP Act" enacted in 2022 is a clear proof of this. The bill allocated $39 billion in direct funding to chip manufacturers to accelerate the construction of new facilities. Intel, as the biggest beneficiary, received $8.5 billion to promote the construction of new wafer fabs in Arizona and Ohio. As the leader of the US chip manufacturing industry, Intel currently accounts for about 41% of the US 300mm wafer production capacity and occupies a pivotal position in key market segments.

However, Intel is facing severe challenges. The core problem is the sharp decline in demand for its own chips. In particular, its traditional strength, the data center business, has been hit hard. AMD has eroded its server CPU market share. At the same time, a large amount of data center budget has flowed to Nvidia's GPU accelerators, which are becomingGenerative AIIntel’s data center revenue is expected to slip to $12.6 billion this year, less than half its peak four years ago, according to Visible Alpha estimates.

Three years ago, Intel launched a massive and ambitious plan to catch up with TSMC’s leading position in manufacturing technology. Unfortunately, this strategy failed to foresee and adapt to the rapid rise of artificial intelligence, so that Nvidia was far ahead. Chris Caso, an analyst at Wolfe Research, a market research firm, pointed out: "Intel's problem is that the server-centric data center market that it originally relied on has undergone fundamental changes, replaced by huge investments in the field of artificial intelligence, and Intel has obviously failed to seize this transformation opportunity."

Intel's fab capacity underutilization is undoubtedly a heavy financial burden for the high-fix-cost chipmaker, which directly dragged down its second-quarter adjusted gross margin to 38.7%, 5 percentage points lower than Wall Street's expectations.

Wall Street analysts are divided on Intel's future direction. One group advocates focusing on revitalizing product leadership, even if it means reducing foundry services to external chip designers. The other group emphasizes that more efforts should be made to expand the foundry business and attract more large customers, because Intel's chances of gaining competitiveness in key markets such as data center GPUs look slim.

However, the implementation of these strategies is not easy. The interruption of dividends has deprived investors of a stable source of income. Intel is now one of the few companies in the Dow Jones Index that does not pay dividends. But its important position in key areas of national security provides Intel with some support. As Caso said: "Given the strategic significance of domestic semiconductor production in the United States, it is hard to imagine that the US government will sit idly by and watch Intel fall into despair."

In the foreseeable future, "Uncle Sam" (referring to the US government) may become Intel's strongest backer. (Compiled by Jinlu)