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Intel’s stock takes a battering, search for new CEO could be make or break

Intel booted its CEO, Brian Krzanich, after a “consensual” relationship with an Intel employee came to light recently – in violation of Intel’s anti-fraternization policy. Now marks a major turning point for the company, as it needs to find the right person to lead the charge into some major new markets – the IoT, 5G, and the AI sector. A stagnant PC market has led Intel to seek new growth, but it doesn’t have a great track record in new markets.

Looking at the financial community’s reaction to the news is telling. Based on the intervals in the Riot 50 database, kicking Krzanich cost Intel around $10.7bn in market cap, with its share price falling $2.61 (5%) to $52.50 from the week before. At the time of writing, the price is now down to $49.67 (11%), with market cap at $223.5bn – a much steeper loss. However, it is very much worth noting that all the semiconductor companies in the Riot 50 have seen their stock price fall in that period – which is repeated across the rest of the database.

However, Intel’s continued fall sticks out. Krzanich’s resignation may have triggered the investment community to reassess the company, which has just been hit with another hardware-based fault in its CPUs. If the bad press continues, its chief rival AMD might finally claw back some market share from Intel – which it hasn’t had since the days of its Opteron chips. Even ARM-based chips are poised to strike, from the likes of Cavium.

It can be argued that Intel’s 99% share in the data center has made it complacent in recent years – too focused on expanding into new areas to ensure its cash-cow remained top of the market. It failed in mobile processors, only managing some wins for LTE modems (while still apparently completely outclassed by Qualcomm there). It also bailed on its low-power IoT chip designs recently. In addition, its purchases of Altera and Mobileye, both north of $15bn, have big risks of not panning out well.

Altera’s FPGAs could help to ensure that Intel’s Networking Interface Card (NIC) line remains healthy, after Xilinx’s designs began increasing pressure on Intel’s non-FPGA offerings. Buying Altera gave it an immediate lead in the FPGA market, which was also turning to AI workloads – an area that Intel hopes it data center offerings will benefit from. Microsoft is using Intel’s Altera FPGAs in its Azure platform, but dedicated AI processors and general purpose GPUs are major threats in that market too – with Nvidia the current darling, enjoying a huge growth.

Wall Street is now waking up to these technological risks, with Bernstein downgrading its price target to $42, noting that “it is becoming increasingly apparent that the structural issues we have promulgated for years are becoming ever obvious to investors.” Bernstein also cited a slow down in Intel’s Earnings per Share (EPS) as another reason for the downgrade, and other Wall Street types have noted that Intel’s dividends have been high to help protect its share price, and that a reduction in dividends would seriously devalue the stock.

Under Krzanich’s tenure, Intel’s share price has soared. A year ago, it was in the $33 range, and when the former CEO took charge, in May 2013, it was nearer $24. Having doubled the share price in 5 years, Krzanich was pretty popular among investors, but now it seems that Wall Street might be reexamining its estimations – as fears of a US trade war with China mount. Money seems to be have been flowing into AMD in the past quarter, rising from $9.71 in April to a peak of $17.11 on the 18th of June. However, AMD hasn’t been able to seize on this Intel misstep, as it has now dipped to $15.41.

So did the board use the dirt on Krzanich to boot him cleanly, hoping not to trigger the fall in share price that often accompanies such a move? We won’t know until such a memo was leaked, but it looks like a very sudden pull of the trigger. It’s not clear how or when this news came to light, and if this were a movie, such a secret would have been a fortuitous card to hold in reserve, for a disgruntled share holder to later weaponize.

As Rethink’s Research Director, Caroline Gabriel, puts it in Wireless Watch:

Many of Intel’s next moves will relate to industrial and telco trends – 5G, IoT, multi-access edge. Its success or otherwise will determine the reputation of its next CEO, but also the legacy that is perceived for Krzanich. Overall, the departing CEO is likely to leave a more robust legacy than the reports surrounding his exit are suggesting. He has had failures, one of them in mobile devices, but the rot had set in there before he took the helm – he merely took the decision to put the smartphone SoC business out of its misery. He has failed to follow through sufficiently strongly and consistently on some of his bolder moves, such as turning the Altera acquisition into a powerful integrated platform, or becoming a major foundry. And some of those decisions have proved to be distractions, like Quark.

But the slowdown in PC chip sales has been slower than feared, partly because of some agile thinking in terms of post-PC form factors; and the most recent set of quarterly results highlighted the resilience of the data center business, despite new challengers.

Now Intel’s board has to decide whether to follow its usual pattern and appoint the new CEO from within, or look for some new blood, perhaps to come up with a radical vision of how Intel can succeed in markets like the IoT, while ensuring that China is more friend than rival, and even perhaps moving more aggressively back to its memory chip roots to claw some share back from Samsung.

But Intel has never hired an external CEO, though it has recently appointed some outsiders to very senior positions, most notably Murthy Renduchintala, the previous Qualcomm co-president who joined Intel in 2016 and is now an EVP, group president of technology, systems architecture & client group, and chief engineering officer. He will be a hot tip for the CEO role, though there are four other EVPs (Intel’s most senior rank of managers) including interim CEO Swan. The others are Navin Shenoy, general manager of the data center group; Leslie Culberton, general manager of product assurance and security; and Steven Rodgers, general counsel.

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