Intel's top management in turmoil, four years of investment ruined in an instant?

AI transformation difficulties, performance losses, and pressure from competitors have left Intel in turmoil. However, last month, Intel CEO Pat Gelsinger was still full of energy, claiming that the company's development was making progress. Yet, this morning, he suddenly resigned...

On December 3rd, Intel announced that CEO Pat Gelsinger retired on December 1st and has resigned from the board of directors.

At the same time, Intel appointed Chief Financial Officer David Zinsner and new Chief Product Officer Michelle Johnston Holthaus as interim co-CEOs while the board searches for a new CEO.

As a "veteran" with over 40 years at Intel, Gelsinger was called to duty four years ago to formulate an ambitious plan—going all in on advanced processes. Although Intel's technology has made significant progress under Gelsinger's leadership, the company's performance and stock price have moved in the opposite direction.

The Intel board has also lost confidence in his plan to reverse Intel's decline, preferring to place products at the "center." The escalation of strategic conflicts may be the main reason for Gelsinger's sudden departure.

Analysts believe that Gelsinger's departure signifies a major adjustment in Intel's strategy. What does this transition mean for Intel? What will happen to Gelsinger's "legacy" of the 18A process? Can Intel avoid the fate of being split up?

A "veteran" of over 40 years, all in on advanced processes

Gelsinger's departure marks the end of an era for Intel and further exacerbates the turmoil of this former chip giant.

Gelsinger began his career at Intel in 1979 and left in 2009, making him a "veteran" with over 40 years at the company. As Intel's status declined, he returned in 2021 and took on the role of CEO.

At that time, he was seen as Intel's "savior," determined to help Intel revitalize its foundry business and reclaim its position as the "leader" in chip manufacturing.

Going all in on advanced processes and striving for subsidies from the CHIPS Act were key focuses of Gelsinger's work over the past four years.

Gelsinger ventured into the chip manufacturing field, fully betting on advanced processes and directly competing with Taiwan Semiconductor and Samsung Electronics. He stated that he had bet the entire company on the 18A process. As part of the revitalization strategy, he planned to expand Intel's factory network, including building a massive semiconductor factory in Ohio.

Although Intel's technology has made significant progress under Gelsinger's leadership, it has struggled with securing subsidies, sales performance, and stock price performance.

Last week, the U.S. Department of Commerce finalized direct funding for Intel under the CHIPS Act, totaling $7.865 billion, but this funding is lower than the initially announced $8.5 billion On the other hand, against the backdrop of the increasing importance of artificial intelligence, Intel's overall decline is most evident, with competitors gaining market share in Intel's core business.

This predicament is reflected in its performance, as Intel reported unexpected losses and poor sales forecasts in the second quarter, and also suspended dividends that had been paid since 1992. To control costs, Intel announced it would lay off more than 15% of its workforce. This has led to more investor skepticism, with Intel's stock price plummeting in recent years, resulting in a market value loss of more than half.

Various signs indicate that Intel is far from being saved, which also seems to be a reason for Gelsinger's departure.

According to Bloomberg citing informed sources, the conflict between Intel and the board reached a climax last week when Gelsinger discussed the company's progress in regaining market share and narrowing the gap with Nvidia. The board gave him a choice: either retire or be dismissed, and Gelsinger chose to announce the end of his career at Intel.

Strategic Shift: From "Advanced Process" to "Product First," What Does This Mean?

Analysts believe that Gelsinger's departure may bring about a significant strategic shift, with "advanced process" being halted and "product first" becoming the focus.

Frank Yeary, the independent chairman of Intel's board, stated, "As a board, we first know that we must place products at the center of all our work."

Wolfe Research analyst Chris Caso stated:

This move opens the door for a new strategy that has been advocated for some time. Although Gelsinger has generally succeeded in advancing Intel's process roadmap, given Intel's absence in the AI field, Intel does not have enough scale to pursue cutting-edge manufacturing on its own.

Citigroup pointed out in its latest report that Gelsinger's retirement and a potential exit from the foundry business in the short term may bring benefits, but in the long term, it could be painful, as the CEO is a key driver of process improvements:

There may be short-term benefits if Intel exits the foundry business, which would be the best option for Intel shareholders, and given that Gelsinger was a supporter of this area, we now believe this possibility is higher.

However, if the new CEO is not an expert in technology/manufacturing, it could be painful in the long term. If Intel is to restore its manufacturing level to that of Taiwan Semiconductor/AMD, there is still a long way to go, as Gelsinger was the main driver of technological improvements.

We believe Gelsinger has begun to correct manufacturing issues; when he joined, Intel was nearly two years behind Taiwan Semiconductor/AMD, and now it is expected to catch up or be on par by the end of 2025, which we see as an incredible achievement

Our view on Intel remains unchanged. If Intel exits the foundry business, gross margins could rise to a mid-low level of 50%, with earnings per share (EPS) between $3.00 and $4.00, potentially driving the stock price to $50-$60, and the rating would become optimistic.

Overall, Citigroup believes that Gelsinger is the best CEO to fix Intel's manufacturing issues. If the new CEO is not as proficient as Gelsinger in advanced semiconductor manufacturing, the risk of Intel continuing to lag behind Taiwan Semiconductor/AMD increases. Currently, Zinsner is responsible for overseeing recent cost-cutting efforts, while Holthaus has worked at Intel for nearly 20 years, but no one in the senior management possesses the technical expertise of Gelsinger.

Lifeline - What will happen to the 18A process?

Gelsinger once said, "I have bet the entire company on the 18A (equivalent to 1.8nm) process," highlighting the importance of the 18A process. Previously, it was reported that the 18A process is expected to enter mass production in the second half of 2025.

With Gelsinger's resignation, despite Intel emphasizing better execution of products and the critical 18A process, where will the 18A process go?

Daniel Newman, CEO of Futurum Group, believes:

The importance of bringing manufacturing back in-house cannot be overstated; the company's fate and Gelsinger's legacy depend on it.

Regarding the subsequent implementation, Bank of America analyst Vivek Arya stated:

The costs of achieving this milestone may further increase, and "external recognition from large fabless customers is still needed." However, this expensive work is crucial for getting Intel back on the cutting edge and becoming an attractive partner for leading chip design companies like Nvidia.

Logan Purk, a senior research analyst at Edward Jones, stated:

If Intel cannot execute 18A, then everything will be in vain. Given the slow pace of technological advancement and cost reductions, along with the rapid development of competitors, Intel's next CEO may face a more challenging task than Gelsinger.

Two CEOs, can Intel avoid the fate of splitting?

It is noteworthy that Intel's appointment of two interim CEOs has sparked speculation about the company splitting.

Intel appointed Chief Financial Officer David Zinsner and new Chief Product Officer Michelle Johnston Holthaus as interim co-CEOs, after Intel had already established an internal separation between its foundry business and its product business.

Bank of America analyst Vivek Arya wrote in a report to clients on Monday:

We now see a greater likelihood that Intel is considering separating its product and foundry divisions, which would provide much-needed operational and financial independence for both businesses One advantage of the spin-off is that the company can focus on designing computer chips for PCs, data centers, and artificial intelligence. This specialization has helped competitors AMD and a great company technically lead Intel, providing more advanced chips for specific markets.

At the same time, Intel Foundry can freely attract these competitors as potential customers, offering Intel's own factories to manufacture chips for these companies. Intel Foundry can also seek external investment or borrow large sums of money without burdening Intel products with billions of dollars in debt.

However, as a spin-off, Intel still faces significant challenges.

Intel Foundry is a loss-making company, and it has warned that it will continue to burn cash for at least the next few years, as it needs new expenditures to build more advanced factories. Moreover, Intel Foundry has only one major customer—Intel Products.

Jim McGregor, a semiconductor industry analyst at TIRIAS Research, stated:

When you need to make a big bet over 5 or 10 years, you cannot afford to spin off a loss-making part of the business.

Complicating matters, just last week, Intel reached an $8 billion federal subsidy agreement, accepting restrictions on its ability to separate its business, as the Department of Commerce clearly wants to ensure that Intel Products will continue to support its foundry business.

Overall, whoever takes on the role of Intel's new CEO will face enormous challenges