Intel (INTC -3.26%) used to be one of the most innovative technology companies -- if not the most. In 2000, it was among the largest companies in the world by market cap and dominated the semiconductor market with its vertically integrated design and manufacturing strategy.
In the last two decades, this business model has crumbled. With the rise of design-only firms like Nvidia and Advanced Micro Devices taking market share, Intel has gone through a long fall from grace. After its most recent stock collapse, shares have now posted a negative total return since Jan. 1, 2000 -- close to 25 years of negative cumulative returns for long-term shareholders.
Times are bad for the leading American semiconductor manufacturer right now. What's wrong with its stock? Should contrarian investors buy the dip? Let's explore what's going on with Intel right now.
Market share losses to Taiwan Semiconductor Manufacturing
Historically, chipmakers would both design and build their products. That is, until Taiwan Semiconductor Manufacturing came along. The company (known as TSMC for short) operates what is known as a foundry model: building semiconductors for third-party customers like Nvidia and AMD.
Focusing solely on manufacturing and ignoring design has allowed TSMC to move quickly. It also helps that it has earnings from hundreds of design customers that it can reinvest to make its chip development even better.
Starting about 10 to 15 years ago, Intel began to fall behind TSMC because it would not give up the vertical integration of both designing and manufacturing computer chips. The clincher was TSMC embracing extreme ultraviolet lithography (EUV) systems from supplier ASML, which have been the key technology for recent advancements in semiconductors.
Intel has slowly lost market share to the design companies that run their businesses on top of TSMC's manufacturing platform. Even Apple, Intel's neighbor in Silicon Valley, is now a huge customer for TSMC.
Financials tell the story
Intel's fall was many years in the making. It is finally showing up in the company's financial statements. Even though the semiconductor market is booming due to artificial intelligence (AI), revenue was down to $55 billion over the last 12 months; it was close to $80 billion a few years ago.
Free cash flow looks even worse. It was a negative $12 billion over the trailing 12-month period and has been negative for close to two years now. For the 25 years prior, Intel had always generated positive free cash flow.
Now, with its back against the wall, the company is finally making moves to modernize and compete with TSMC as a foundry. But is it too little too late?
INTC free cash flow; data by YCharts.
The new foundry plans
In the last few years, Intel finally began to embrace the foundry model and said it would start to manufacture chips for third-party design customers. It plans to spend tens of billions of dollars building new manufacturing facilities around the world to better compete with TSMC.
Most of them will be in the United States and Europe. The U.S. government is planning to give it $19.5 billion in grants under the new CHIPS Act, although it has not received this funding yet.
So far, its foundry business is a huge laggard. Last quarter, it generated just $4.3 billion in sales and had a $2.8 billion operating loss. Revenue was barely up year over year. In order to make a profit with all this capital spending, Intel will need to significantly grow foundry revenue in the coming years; it's not currently happening.
Investors are increasingly pessimistic about Intel owning both its design and foundry segments. The latter business is very far behind TSMC and needs to act quickly to catch up. So the stock is tanking and below where it traded in 2000, because there is no momentum with the foundry segment.
Intel is vital to the U.S. government, so it will get a lot of help through this rough patch. But the U.S. and other Western nations are partnering with TSMC as well. There is not one guaranteed winner in modern semiconductor manufacturing.
Intel stock is down 72.5% from its 10-year high, and it's possible the pain is only just beginning for shareholders. The company has dug itself a deep hole by not embracing the foundry manufacturing model earlier. It is unclear whether it is too late to build its way out. Investors' best bet is to stay far away from the stock until it does.
