US Stocks Face "Black Monday" as Intel Shares Plunge Up to 10%
On August 5th, U.S. stock markets experienced a tumultuous session famously dubbed “Black Monday,” continuing a downward spiral that had begun the previous week. Intel, a stalwart in the tech sector, saw its shares dip significantly during pre-market trading. When the market opened, the company's stock price plummeted, recording a decline of nearly 10%. As the session unfolded, Intel's stock settled at approximately $19.845 per share, reflecting a drop of 7.61% at the time of reporting.This alarming decrease stems from waning investor confidence in tech firms and disappointing revenue expectations. Last week, Intel released its second-quarter financial results alongside the announcement of a massive workforce reduction plan, poised to affect around 15,000 employees before year-end. In an extraordinary move for the company, CEO Pat Gelsinger declared that Intel would halt dividends starting in the fourth fiscal quarter—the first such suspension in nearly 32 years. This shocking news sent ripples through the secondary market, with Intel shares plummeting over 26% in after-hours trading, marking the steepest decline since 1982.In a frank memorandum addressed to employees, Gelsinger articulated a sober outlook, stating, “I won’t kid myself into thinking that the road ahead will be smooth… More difficult days are yet to come.”Since assuming leadership at Intel, Gelsinger has been ardently focused on reclaiming the company’s erstwhile dominant status, with a strategic road map dubbed IDM 2.0 aimed at restoration. This initiative has become the cornerstone of his vision for the company. Previously, he outlined a plan that consists of five milestones over four years. Now, amid the rise of artificial intelligence, Intel is integrated AI chip manufacturing into its IDM 2.0 strategy.The semiconductor industry is fiercely competitive and operates on the principle of 'seize the day.' However, as Intel expands its ambitious plans, the corresponding financial commitments have grown exponentially. As of the second quarter of this year, Intel’s cash reserves stood at $11.29 billion, overshadowed by a staggering $32 billion in current liabilities.Amid ever-increasing financial pressures, Gelsinger has launched a comprehensive adjustment strategy directly addressing Intel’s fiscal reality. During a post-earnings telephone briefing, he admitted that the financial performance in the second quarter was “disappointing,” acknowledging that revenues did not grow as anticipated and that the company had yet to fully capitalize on the burgeoning trend of artificial intelligence. “Our costs are too high, and our profits are too low,” he lamented.Examining the financial specifics, Intel’s burgeoning losses in the second quarter were primarily influenced by a plunging gross margin. The company recorded a gross margin of 35.4%, which was a staggering 5.6 percentage points lower compared to the previous quarter and significantly beneath the market expectation of 42.1%. The steep decline in gross margin was attributed to an influx of AI PC products, transitional costs from wafer fabrication facilities, and various non-core business expenses.Notably, research and development expenses comprise a significant portion of Intel’s non-core costs. In the second quarter, the R&D expenditure surged to $4.239 billion, marking a year-on-year increase of 6.6%, with R&D spending grading at 33% of revenues—nearly parallel with the company’s gross margin for that quarter. Once, Intel boasted a gross margin exceeding 50% in the second quarter of 2021, but over the years, this figure has exhibited a generally downward trend due in part to cyclical fluctuations in the semiconductor sector and the company’s aggressive investments in advanced manufacturing capabilities. Since the first quarter of 2022, Intel’s R&D spending as a percentage of revenue has consistently breached the 20% mark and remains above 25% even through this turbulent period for the chip industry.While Intel harbors ambitious aspirations, it faces substantial deficits; the company disclosed an operational loss of $7 billion in its foundry business for 2023, a stark increase from the $5.2 billion loss of the preceding year.Intel's president for China, Wang Rui, articulated in an interview that the IDM 2.0 strategy is a “path that we must take.”Despite carving out a prominent niche in the PC era, Intel is grappling with challenges to sustain its celebrated business model. It's worth noting that the rise of personal computers established Intel as America’s leading chip manufacturer, buoyed significantly by the flourishing of its CPU processor market through personal computing and data center divisions. Analysts have observed that Intel’s client computing segment has maintained a fairly steady market share over the years—this trend underscores a crucial point: the intertwining fortunes of Intel with the performance of the PC and data center CPU markets.However, since 2022, the explosive demand for computing power fueled by generative AI has redirected attention within the data center market. While Intel launched its Gaudi series computing chips to compete with Nvidia, the latter’s GPU offerings continue to dominate market preference.Furthermore, the surging position of GPUs has resulted in AMD, previously criticized for its dual business model combining CPUs and GPUs, capitalizing on its structural advantages to reclaim market share from Intel CPUs. According to the fourth-quarter statistics from market research firm Mercury Research, AMD's EPYC processors have secured 23.1% of the server market, with the share increasing. Although EPYC processors may not match the numerical prowess of GPU accelerators, they are designed to synergize efficiently with AMD's GPUs and AI accelerators.Meanwhile, Qualcomm has emerged as another rising contender in the CPU domain after unveiling its Snapdragon X Elite chips in May, which are now integrated into Microsoft’s new Surface Laptop and Surface Pro. On the other hand, the growing prominence of ARM architecture presents a looming threat to Intel's PC ambitions. After Apple successfully launched its ARM-based M1 chipset in 2020, the chip showcased remarkable performance and energy efficiency. Consequently, Qualcomm, MediaTek, AMD, and Nvidia are rolling out or have plans to debut ARM-based processors, while Intel has shown reticence to embrace ARM architecture, remaining firmly entrenched in the x86 domain.Despite these challenges, Intel’s client computing department that includes PC business reported revenues of $7.41 billion in the second quarter, up 9.3% year-on-year, representing one of the few bright spots in an otherwise dismal earnings report. With both desktop and laptop sales witnessing varied growth, data suggests that global PC shipments have resumed a modest recovery after hitting a low, recording a total of 64.9 million units shipped in the second quarter—a year-on-year growth of 5.4%. Market analysts suggest that though the PC sector appears to be emerging from its nadir, the overall demand remains modest, casting doubts on whether Intel can sustain its current revenue growth momentum in the PC business.As for the burning question of whether AI might save the day for Intel, it appears that AI PCs represent one of the most viable monetization models in the realm of artificial intelligence. Notably, competitors like Microsoft and Apple have ventured into AI-enhanced devices, while a fierce competition has materialized between Nvidia, Intel, and AMD in the AI chip domain. Wang disclosed that since the launch of the Intel Core Ultra processors, 8 million devices have been equipped with this technology, with expectations of delivering an additional 40 million units by year-end.However, Intel’s rivals are equally relentless. In stark contrast, recently concluded at the 2024 ChinaJoy event, AMD announced the launch of products featuring their AI Ryzen 3000 series processors in collaboration with leading OEM partners. Earlier, during the 6.18 sales event, AI PCs powered by Qualcomm’s Snapdragon X Elite/Plus processors started to hit the market, while Intel’s Lunar Lake processors targeting the next generation of laptops won’t make their debut until September, placing it in a disadvantageous position.The pressure is now mounting on Intel's Gaudi 3 chip, which is critical in rivaling Nvidia’s H100 chip. Analysts believe that the success or failure of Gaudi 3 will greatly influence external perceptions of Intel, as well as Intel’s internal confidence.Within the current AI “arms race,” Nvidia appears to be maintaining its lead in the GPU market, recently unveiling the next-generation AI computing chip, the B200, with CEO Jensen Huang stating that it offers 20 petaflops of computational performance using FP8 and the new FP6 specifications—2.5 times more performance than the previous H100 generation.According to Intel’s second quarter financial results, the company is grappling with a downturn in its data center and AI segments, which saw revenues decline by 3%, signaling weak market demand for Intel’s offerings. CFO David Zinsner conceded that despite increased investments in AI infrastructure, much of the GPU procurements have been for brands other than Intel, predominantly Nvidia.In a bid to catch up to Nvidia, Gelsinger has previously indicated that besides designing the Gaudi 3, Intel is gearing up to manufacture AI chips in its new Ohio factory. Yet, this initiative may not bear fruit until 2027 or 2028, leaving Intel to navigate a complex and uncertain road ahead.In Gelsinger’s address to investors, he acknowledged that 2024 could be the year with the most significant operational losses for its foundry business, while projecting that the foundry segment will reach operational breakeven by the end of 2030. This forecast implies that in the interim, other segments of Intel will need to subsidize the foundry business, but fluctuating market conditions may challenge this precarious balance, leaving outcomes difficult to predict.