What happened
Shares of Intel (INTC 5.25%) fell 20.2% in July, according to according to data from S&P Global Market Intelligence, as the processor giant nicknamed "Chipzilla" plummeted following its second-quarter earnings report.
Intel handily beat analyst expectations for both revenue as well as earnings per share during the quarter; however, management's bombshell announcement that its 7-nanometer chips will be delayed and fall 12 months behind schedule caused a virtual panic among the company's investors.
Image source: Getty Images.
So what
Intel had already fallen behind competitors in its transition to 10-nanometer chips, going from a leader in the industry to a laggard behind Advanced Micro Devices (AMD 3.86%), which uses Taiwan Semiconductor Manufacturing (TSM 4.32%) for its manufacturing process. Now with a further delay in its next node transition, investors are fearing Intel's current industry-leading market share and profitability could take a hit in the years ahead.
On the conference call with analysts, CEO Bob Swan said Intel may begin to use an outside foundry such as TSMC for some of its manufacturing: "We will continue to invest in our future process technology road map, but we will be pragmatic and objective in deploying the process technology that delivers the most predictability and performance for our customers, whether that be on our process, external foundry process, or a combination of both."
Now what
Subsequent to the end of the quarter, Intel announced that its chief engineering officer will be departing the company. Furthermore, Taiwan's Commercial Times newspaper reported that TSMC had already received a large order for Intel chips in 2021. Using TSMC could at least get Intel back on par with its competitors, which, while worse than its traditional leadership position, is also a better alternative than falling further behind.
Intel's stock is also extremely cheap right now, especially for the high-priced technology sector, trading at just nine times tailing earnings and with a dividend yield of 2.8%. Assuming Intel's retooling of its engineering leadership and concession to use TSMC gets it back on some sort of competitive track, Intel could end up being a bargain, especially as demand for data center processing continues to grow. However, if Intel hits further bumps in the road in its technology evolution, then all bets are off.
