Intel (INTC 5.00%) shareholders are licking their wounds once again after the chip titan's latest earnings report.
It's a familiar position for Intel investors. The company has repeatedly disappointed the market, making big promises about revamping its business only to come up short when it's time to open the books.
This time around, Intel beat estimates in the first quarter with a modest increase in revenue, but its second-quarter forecast was worse than expected as it called for flat revenue growth (at the midpoint of guidance) and a decline in earnings.
Intel stock has underperformed its peers for so long that the company's problems run much deeper than just one quarter of underwhelming numbers. After all, the stock is still trading below its peak during the dot-com boom. Only once in the last decade has Intel's annual revenue growth exceeded 10%, even as peers like Nvidia and AMD have delivered monster growth and returns during that time.
The chart below shows how Intel stock's performance compares with the Van Eck Semiconductor ETF, which holds a diversified group of chip stocks, over the last decade.
Data by YCharts.
While the last decade has been a storybook chapter for the semiconductor sector, Intel has lost the plot.
There's no simple explanation for the company's woes. Intel remains a large and generally profitable company, but it's consistently lagged behind its peers.
One Warren Buffett quote may offer the best explanation for what's behind Intel's chronic underperformance. The Berkshire Hathaway chief once told his deputies, "We can afford to lose money -- even a lot of money. But we can't afford to lose reputation -- even a shred of reputation."
A decline in reputation doesn't show up directly in the numbers, but it can be an unseen reason why one competitor outperforms another. While it's not quantifiable, the consequences are very real over time, and that seems to be part of what has plagued Intel.
Image source: Getty Images.
Intel's reputation problem
A wide range of factors influence a brand's reputation, including product quality, culture, corporate behavior, and leadership. Reputation can affect both customer demand and employee recruitment.
A weak reputation in product quality can drive customers away, and a history of strategic errors and underperformance can cause investors to head for the exits as well.
While Intel has long dominated the PC CPU market, the company has struggled to leverage that advantage elsewhere.
It missed out on the smartphone and mobile revolution. It lost ground to fabless chip-makers like AMD, and it's had three CEOs in the last six years, while peers like AMD, Nvidia, and Broadcom have had the same leader for a decade or longer. It also bungled its position in the foundry market as it was slow to make 10nm chips, and it now badly trails Taiwan Semiconductor and Samsung in advanced chip manufacturing.
Meanwhile, Intel has spent heavily on dividends and share buybacks over its history, seemingly at the expense of the core business. As the company now tries to crack the AI GPU market, its track record offers plenty of reasons to doubt its capabilities.
Like beauty, a reputation is in the eye of the beholder, and there is a broad range of opinions out there on Intel. Those include critical ones that argue the company lacks innovation and is risk-averse due to its historical dominance of the PC market.
A New York Times expose in 2020 detailed a culture where managers were complacent about outside competition and fighting internally as they withheld information from one another. Separately, but potentially related, Apple famously ditched Intel chips in 2020 to instead put its M1 chips in its Mac computers, delivering longer battery life and a fanless design that helped make them quieter.
On Glassdoor, the employee review site, a number of commenters criticized Intel for a lack of vision, too much bureaucracy, and being slow-moving. In an industry known for "moving fast and breaking things," those qualities are clear weaknesses.
It is worth noting that Intel's corporate reputation is still in good standing. It hasn't endured the kind of scandal that, say, Wells Fargo did a few years ago, but recognition for its ESG efforts is much different than how the company is talked about by prospective applicants at top engineering schools or by its biggest customers when purchasing decisions come around.
NASDAQ: INTC
Key Data Points
Why Intel stock is still best avoided
According to Intel bulls, the two primary reasons to bet on a turnaround are AI and the foundry business.
However, Intel currently looks like a loser in AI as enterprise demand is moving away from its traditional data center chips, and it reported just 5% growth in its data center and AI segment in the first quarter. Additionally, Nvidia is launching its own AI PC chip that could take market share from Intel in its core business
Intel management said it expected more than $500 million in accelerated computing revenue in the second half of the year from the Gaudi 3 AI chip, but that's still a relative drop in the bucket at around 1% of Intel's annual revenue.
The stock also sunk a few weeks ago after it revealed a $7 billion loss last year in its foundry division. The company plans to reach break-even by 2027 in the foundry business and deliver operating margins of 25% to 30% by 2030, but six years is an eternity in the chip sector. Intel's own history of missed opportunities as well as stiff competition from the likes of TSMC mean investors should take that forecast with a healthy grain of salt.
Finding success in either of those businesses will require improving its reputation, and that could take a long time as another Warren Buffett quote reminds us.
Buffett once said, "It takes 20 years to build a reputation and five minutes to ruin it."
Rebuilding Intel's reputation might not take 20 years, but investors should be skeptical of the chip giant until it proves it can innovate and compete in new markets, and that is likely to take several years to play out.
