Why Intel's stock is crashing and poised for further decline

Friday's drop of almost 26% is driven by poor earnings, the suspension of dividends and plans to cut 15,000 jobs under a $10bn cost-reduction plan

Intel's headquarters in California. The company was once part of the Four Horsemen – tech companies that were leading players during the dot-com boom of the late ’90s and early 2000s. AFP

Intel lost about $25 billion in market value and reported a 26 per cent drop in stock price on Friday in what marked its worst sell-off since 2000.

The drop was driven by weaker-than-expected earnings in the June quarter, the suspension of dividend payments and plans to cut jobs to fund the overhaul of its chip manufacturing division – all part of Intel's $10 billion cost-reduction plan.

Industry analysts view these cost-cutting initiatives as the company’s attempt to turnaround its chip-making business amid dwindling profits and market share.

The National looks at the factors contributing to the share price crash of a company that was once an undisputed leader in the chip market and explores what lies ahead for the company and the overall industry.

Steepest decline since 2000

Intel fell 26.06 per cent to close at $21.48 a share on Friday, plummeting the company's market value to $96.76 billion. It closed 5.5 per cent down at $29.05 on Thursday, giving the company a market capitalisation of $121.21 billion.

Friday's decline in market cap marked the company's biggest drop since shares crashed after the dot-com bubble burst between 2000 and 2002. It also marked the second-largest decline in the company's shares, surpassed only by a 31 percent drop in July 1974, three years after Intel's initial public offering.

The company's shares have dropped 55.06 per cent since the start of the year and 37.54 per cent in the past 12 months.

Industry experts expect the company to fall further next week.

Financial services company Raymond James adjusted its outlook on Intel on Friday, shifting the stock from an “outperform” rating to “market perform”. It expressed concerns over the chip maker’s future earnings potential.

In stock markets, an outperform rating signals an expectation that shares will perform better than the overall market while the market perform rating indicates that the stock could provide average returns.

Once part of Four Horsemen

The company was part of dot-com era's Four Horsemen, the term referred to four major technology companies – Intel, Cisco, Microsoft and Dell. They were considered leading players in the tech industry during the dot-com boom of the late 1990s and early 2000s.

Intel’s market cap reached its peak at about $500 billion in the 2000 but this was followed by a significant decline in the stock market, known as the dot-com crash, during which the shares of many tech companies plummeted.

After that sell-off, Intel's stock market value never returned to its peak.

Investor confidence ebbs

One of the largest chip makers by revenue, Intel reported a net loss of $1.6 billion in the second quarter ended on June 29, compared with a net income of $1.5 billion in the same period last year.

The loss per share stood at 38 cents in the last quarter against earnings per share of 35 cents in the corresponding period in 2023.

Revenue during the April-June period dropped by about 1 per cent annually to $12.8 billion, missing analyst expectations of $12.9 billion.

Its operating loss expanded to $2 billion in the previous quarter compared to $1 billion in the prior year period.

Gross margin – a financial metric that highlights the percentage of revenue that tops the cost of goods sold – stood at 35.4 per cent, down 0.4 percentage points.

In its note to investors, Raymond James cautioned that gross margin headwinds were expected to continue through next year, with limited opportunities for revenue growth.

It indicated that the company's profitability would remain under pressure in the coming quarters.

Pessimistic top executives

On Thursday, Intel chief executive Pat Gelsinger said that the second-half trends of fiscal 2024 will be more challenging than the company had previously expected.

His comments added to investors' worries and led to a decline in the price of Intel's shares and market cap on Friday.

“Our second-quarter financial performance was disappointing, even as we hit key product and process technology milestones,” Mr Gelsinger said.

He said the company is taking new cost cutting decisions amid hopes that this could potentially improve operating and capital efficiencies in the coming quarters.

“Second-quarter results were impacted by gross margin headwinds from the accelerated ramp of our AI PC [artificial intelligence-enabled PCS] product, higher-than-typical charges related to non-core businesses and the impact from unused capacity,” said chief financial officer David Zinsner.

The company also issued a dismal guidance for the third quarter, ending on September 29.

For the July-September period, Intel predicted its revenue to hover between $12.5 billion and $13.5 billion, compared to $14.2 billion reported in the same period of last year. It expects its loss per share to reach 24 cents during the period.

Few cheers for expense reduction

Intel have announced a series of cost-reduction initiatives that aim to hasten growth in profitability and operational efficiency.

Some of the actions include structural and operational realignment, headcount reductions and the cutting of operating expenses and capital expenditure totalling more than $10 billion by 2025.

Intel expects these moves to help put it on the path to a sustainable business model, with additional financial resources and liquidity needed to support its long-term strategy. The tech giant said these initiatives will implement the next phase of a multiyear transformation strategy.

Cutting expenses

Intel has announced plans to reduce total capital expenditure by more than a fifth, compared with previous estimates, to between $25 billion and $27 billion this year and to between $20 billion and $23 billion in 2025.

The company has also announced plans to cut operating expenses to about $20 billion this year and $17.5 billion in 2025, with further reductions expected in 2026.

“By implementing our spending reductions, we are taking proactive steps to improve our profits and strengthen our balance sheet,” Mr Zinsner said.

“We expect these actions to meaningfully improve liquidity and reduce our debt balance while enabling us to make the right investments to drive long-term value for shareholders.”

Slashing jobs and suspending dividends

Intel will reduce its headcount by 15,000, or 15 per cent of its workforce. Most of the affected employees will be let go by the end of this year.

Next week, Intel will announce a companywide enhanced retirement programme for eligible employees and encourage employees to opt for voluntary retrenchment to cut costs.

“This is painful news for me to share. I know it will be even more difficult for you to read ... this is an incredibly hard day for Intel as we are making some of the most consequential changes in our company’s history,” said Mr Gelsinger in a memo to the staff announcing job cuts

The company also suspended dividends from the fourth quarter and defended the move as crucial to preserving liquidity to support the investment needed to execute its future strategy.

“Our costs are too high, our margins too low. We need bolder actions to address both – particularly given our financial results and outlook for the second half of 2024, which is tougher than previously expected,” Mr Gelsinger said.

Leading global decline

Intel’s losses led global chip companies to fall on Friday. Another US chip maker and AI company Nvidia was down 1.78 per cent at market close, ending at $107.27 a share on Friday.

In Asia, Taiwan Semiconductor Manufacturing Company, popularly known as TSMC, closed more than 4.5 per cent lower in Taiwan while Samsung was trading 4.21 per cent down.

Another chip maker SK Hynix, which has some big customers such as Nvidia, closed 10.40 per cent lower.

Has Intel struggled to adapt to evolving demands?

“Intel’s stock decline has been in the making for quite some time … their earnings miss, cost cutting plans and unprecedented layoffs are disastrous moves for the company. Decline in stock price will be hard to bounce back soon,” Robert Hodgins, founder of Miami-based Sand Hill Road Technologies Fund, told The National.

Industry analysts noted that Intel has potentially missed the opportunity to capitalise on the surging demand for computing power driven by AI, a move that allowed companies like Nvidia to gain a competitive edge.

The company also failed to recognise the shift in the semiconductor industry, where different parts of the production process - such as design, manufacturing, and packaging - have become more specialized and are often handled by separate companies, Dev Nag, founder and chief executive of California-based technology firm QueryPal, said.

“Intel has long been a vertically integrated company … this was great for efficiency and dominance in the mature CPU [central processing unit] market, but has become something of a hindrance in the fast moving AI chip market,” Mr Nag told The National.