Intel unveils aggressive cost-cutting measures amid struggles in semiconductor market

Intel Corporation is implementing a series of cost-reduction strategies and operational changes aimed at reviving its standing in the competitive semiconductor market. These efforts come in the wake of a challenging second quarter for the company, which saw a sharp decline in its share price and disappointing financial performance. Chief Executive Officer Pat Gelsinger recently shared these plans with employees and is expected to present a comprehensive proposal to the company’s board of directors later this month.

Focus on Cost Reduction and Strategic Realignment

Intel’s strategy involves significant restructuring to improve its financial stability and streamline operations. One of the key measures includes a reduction of 15% of its global workforce, equating to roughly 15,000 jobs, as part of a broader effort to save $10 billion by 2025. The company is also planning to significantly scale back its real estate footprint, aiming to exit or downsize around two-thirds of its office spaces worldwide. These moves are intended to address what Gelsinger refers to as “new market realities” and to ensure Intel operates as a more agile and efficient organisation.

Additionally, Intel is exploring the sale of non-core businesses, such as its programmable chip unit, Altera. This is seen as a necessary step to optimise capital spending and concentrate on its core competencies. However, a complete divestiture of Intel’s contract manufacturing operations, known as its foundry business, has not been confirmed, though the company has not ruled out such a move in the future. This restructuring is being guided by financial advisory firms Morgan Stanley and Goldman Sachs, who are helping Intel assess potential assets to sell off and retain.

Expanded Collaboration with Amazon Web Services

In a strategic shift, Intel has also expanded its partnership with Amazon Web Services (AWS). This collaboration involves co-investment in custom chip designs, which includes a multi-year, multi-billion-dollar framework covering products and wafers from Intel. Under this agreement, Intel Foundry will produce an AI fabric chip for AWS on its Intel 18A process and a custom Xeon 6 chip on Intel 3. This builds upon their existing relationship, which already includes the production of Xeon Scalable processors for AWS.

Gelsinger described this collaboration as a demonstration of Intel’s “better together” strategy, leveraging its integrated portfolio of foundry services, infrastructure, and x86 products to capture growth opportunities in the artificial intelligence (AI) sector.

Revamping Manufacturing Operations

Intel’s restructuring also involves significant changes to its global manufacturing strategy. The company announced that it would increase capacity at its existing facility in Ireland, positioning it as the primary hub for European operations. In contrast, plans for new facilities in Germany and Poland have been paused for up to two years due to expected market conditions.

Similarly, Intel’s new advanced packaging facility in Malaysia is being completed, but its start-up will be aligned with current market demands and the utilisation rates of existing capacity. Despite these cutbacks, Intel remains committed to its US manufacturing projects in Arizona, Oregon, New Mexico, and Ohio and is prepared to scale production based on market needs.

Stock Market Reaction and Sentiment Analysis

Following these announcements, Intel’s stock has seen some volatility. On September 17, 2024, Intel’s stock closed at $20.91, up 6.36% from the previous close, indicating a modest recovery. The stock’s recent rise is largely due to positive market sentiment regarding Intel’s restructuring efforts and its expanded partnership with AWS. However, the stock remains 59.22% below its 52-week high, reflecting ongoing concerns about the company’s direction and execution challenges. Over the past six months, Intel’s stock has declined by approximately 50.96%.

Analysts are divided on the future of Intel’s stock. Current forecasts for the 12-month price range from a low of $17 to a high of $66, with an average target of around $32.96, suggesting a potential upside of 53.52% from the current stock price. The consensus rating is “Hold,” reflecting uncertainty about Intel’s ability to execute its turnaround strategy effectively. Some bearish analysts remain skeptical about Intel’s future, citing structural challenges and execution risks, while more optimistic analysts see potential gains if Intel’s restructuring efforts prove successful.

Strategic Goals and Challenges

Intel’s ongoing efforts are part of a larger strategy to regain its competitive edge in the semiconductor market, particularly in the AI sector. The company is focusing on optimising its x86 portfolio, which is central to its AI strategy, and is adjusting its product offerings to better align with market demands. Gelsinger has emphasised the importance of refocusing on these core areas while consolidating its Edge, Automotive, and Software and Incubation businesses to create more integrated product development plans.

The announcement comes after a tumultuous period for Intel, marked by a steep decline in its share price and significant pressure from competitors like Nvidia. The company has struggled with execution issues, including delays in the rollout of new products and high manufacturing costs. Gelsinger acknowledged these challenges, stating, “It’s been a difficult few weeks,” and stressed the need for Intel to adapt and build a “sustainable financial engine” to drive future growth.

While Intel has outlined an ambitious cost-cutting strategy and efforts to pivot towards high-growth areas like AI and custom chip manufacturing, the stock remains volatile and faces significant challenges. Investors should be cautious and consider both the potential upside of Intel’s restructuring plans and the risks associated with execution difficulties and competitive pressures. Those holding Intel stock may see it as a “Hold” while awaiting clearer signs of recovery, whereas new investors should weigh the risks before making any decisions.

Intel’s success in executing these plans will be closely watched by investors and the broader tech industry as it seeks to reclaim its former position in a rapidly evolving market landscape.