← Motley Fool Hidden Gems Investing
Motley Fool Hidden Gems Investing
Intel: 3rd in a Two-Horse Race
00:33:33
Under Pat Gelsinger, Intel fell behind rivals and was late to the game in AI and its foundry business. Is the outgoing CEO to blame?
Loading summary
Transcript31 lines
- [00:05]
Dylan Lewis
The mess at intel gets messier. Motley fool money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley fool analyst Tim Byers. Tim, thanks for joining me. First day back from the Thanksgiving holiday.
- [00:22]
Tim Byers
Yeah, good to be back. Non caffeinated today. It's a hot chocolate day, but it's the season, so why not?
- [00:29]
Dylan Lewis
I would say sugar has its own punch to it. Right? You have some hot cocoa over there. You're getting yourself ready for the holidays. We are back to work today from the holiday break over at Intel. CEO Pat Gelsinger getting ready to step aside. And the chief executive announced that he will be stepping down, ending what I think was probably a pretty disappointing run for a lot of intel shareholders and a lot of people who, Tim, were looking for this tech giant to really rebound and become a major player in the chip game again.
- [01:01]
Tim Byers
Yeah, I'm a little sad because Pat Gelsinger is eminently qualified to be CEO of Intel. He is in some ways an intel lifer. Now, he did leave the company for a period of time, but he has a very long history. He has a technical background, he has lots of semiconductor engineering credentials. And he was coming back with the promise of reestablishing intel as if not a dominant player, a highly performing player in the chip market, particularly in the server market. And that did not happen, Dylan. I mean, over the course of his tenure, AMD has grown its share in the data center and Nvidia has absolutely exploded its share. And if you wanted to sum up the intel problem in one word, it would actually be an acronym and it would be this gpu. It would be Graphics Processing Units because AMD has them. They're nowhere near where Nvidia is, and Nvidia is dominant in them. And GPUs have been crucial over the development of high performance computing, particularly in the data center over the past several years. And intel is a. I mean, they are a competitor in the server space. It's not like they aren't, they've always been, but they used to be dominant. Dylan. And Gelsinger didn't get them back to where they had been and he really hadn't gotten them close. And so it's been one of those maybe like what could have been type of stories.
- [02:50]
Dylan Lewis
I want to rewind the clock to early 2021 when he took the CEO role. I went and found the press release that intel put out when they announced he'd be stepping into that chief executive position. Here's what they said that they Were expecting from him strong execution on Intel's strategy to build on its product leadership and take advantage of the significant opportunities ahead as it continues to transform from a CPU to a multi architecture XPU company. Tim, we've had three years now to see this play out. There are a lot of things that have gone on in those three years that were outside of management's control, but focusing specifically on what the board was looking for them to do. What do you think about the job that he did?
- [03:31]
Tim Byers
So I think you have to say two things can be true here. Intel does have more chipsets, more designs outside of its purely traditional x86 CPU chipsets. It does have that. You know, they are starting to compete in some other areas. But have they been successful? Not really. They are still largely driven by the CPU business or what they call the client business, and to be honest here, the client computing group. So this is just, these are Q3 numbers here. In the data center business, that revenue was up 9%. The client business was down 7%. But just as a total of all products. So 12.2 billion during the quarter, 7.3 billion of that is the client computing group. It is overwhelmingly, Dylan, the dominant piece of the business. So I think if you're measuring what the board asks for, one way to measure it isn't just the number of products, but like could you diversify the revenue? Could you get us a bigger share of the data center? And I think the answer to that is largely no. Even though I think you can fairly concede that intel is still very much a player in the data center. But it's, it is largely a two horse race for dominance between Nvidia and amd. And intel is lagging in third at best.
- [05:11]
Dylan Lewis
That lagging position has put them in a tough spot both in the marketplace and when it comes to their own financials. You look at their business year over year under the Gelsinger regime, year over year, revenue declines in 22 and 23. Gross profit less than half of what it was when he took over. He inherited a company making $20 billion in net income and in free cash flow in 2020. Now that business is in the red, there are the natural shifts that happen as a business gets out there and as new tailwinds kind of take over an industry. How much of this do you feel like really sits at his feet versus the very difficult job of moving a humongous ship like intel and course correcting as the market changes?
- [05:58]
Tim Byers
Yeah, you can't put it all on Pat Gelsinger. And there's a simple reason for that, is that semiconductors is not just a cyclical business, Dylan, it is a roadmap business. So you have chip designs that are sort of scheduled like five, six years out. So in some ways Gelsinger comes in and he is executing on a roadmap that had been established years, years before he even got there. So you, you can't put it all at his feet. And three years is nowhere near enough time. And by the way, in the middle of this, I know we're going to talk about it, the foundry business becomes a much bigger part of the story that's right in the middle of his reign. So no, this is not all at his feet, but you only get a certain amount of time and you do need to figure out how to make your existing product designs more attractive to get what are called design wins. You want to get real design wins in the most advanced servers that are going into the most advanced data centers. And they just weren't doing that. They were really getting out, competed by AMD and Nvidia in that part of the business. But I do want to park just for a second on Foundry and we can follow up on this. Those numbers that you cited, it is true that they have gone from highly profitable to now they are struggling for any kind of profit. The cash flow is not what it once was. They are investing, they've had to invest, they've had to invest in new areas of growth in the number one area they're investing in is Foundry. And that is incredibly expensive and it's going to take a long period of time. I do give Gelsinger credit for recognizing that we have to be in this business, we have to be in this business and we have to use third party tools for a long time. Intel ate all of its own cooking in building chips, in placing chips in machines. It was a highly vertically integrated business and the industry moved on to a company you probably have heard of, Taiwan Semiconductor, and some of their own advanced equipment that they were using from like ASML in the Netherlands for, you know, extreme ultraviolet lithography. And so the industry standard of value chain for creating the most advanced chipsets was sort of evolving outside of intel. And intel wasn't leaning into that. Gelsinger deserves credit for saying, like, look, we do. We have to stop eating just all of our own cooking and we have to look to where the industry is moving and making moves to take advantage of where things we haven't invented could benefit us and our customers. So I think what you said before about turning the Titanic is right. This is like turning the Titanic. You, you really are. You're turning a ship that is massive just in terms of what it is. And it was headed for an iceberg and it probably has kind of grazed the iceberg. But we're not going to know if it's going to get to safe shores for a while. And unfortunately Gelsinger is not going to get to see whether or not it happens, except as an outsider.
- [09:35]
Dylan Lewis
Well, next up at the wheel will be co CEOs in the interim, David Zinser, the CFO of the company, and M.J. holthaus, the general manager of their client computing group. And as you noted, you don't just get to set the agenda, you inherit the roadmap that had been set up for you. And back in September, Gelsinger had laid out the plan for intel, building on the momentum of Foundry, creating a more competitive cost structure, delivering savings, refocusing on the strong x86 franchise and building out their AI strategy. Do you still feel like that is the agenda for intel or are you expecting a major course correction from the interim CEOs that we see?
- [10:17]
Tim Byers
I wouldn't be surprised if there is some big shift of dollars towards making bigger investments in GPUs, but I would be surprised if a lot of that changes. They do need to get. They really need to double down and get better with the x86 architecture because x86 is everywhere and so much software is built on x86. And remember, they're not doing x86 alone. AMD is a big proponent of x86. So together they are. They sort of started a consortium that has a lot of the major computer makers involved in this, Dylan, to improve how x86 works in systems, you know, how you encode for, you know, x86. And so that'll be interesting. We'll see if something comes of that to make better x86 chips. But I do think we'll see more of that. But the big one is going to be Foundry. Neither of these two is going to back off the Foundry business. That is going to be the major area of investment because it's been absolutely nowhere in delivering for intel as a company. It will be. Gelsinger set it up as we are going to make this an independent subsidiary of Intel. That's going to happen no matter who comes in. That's going to happen because it must happen. If you want to compete to manufacture chips, you must be an independent provider. So intel is doing that. They're going to make the Chip Foundry, an independent provider, and they are investing heavily to create the most advanced manufacturing processes they can create inside those factories. What they call it is 18A, in other words, manufacturing at 1.8nm, which is, for perspective, really, really, really, really, really small. Really small. So that's like super advanced chipsets. But they just don't have the customers there yet. But, but they do have a signature customer in aws, so they've got a signature customer. They've got these investments. That is a bet that they just need to see that out. So, yeah, I do like that we're going to see the CFO here because there's going to be a lot of smart capital allocation required. That's going to be step one to getting on the right path here in the post Gelsinger era.
- [12:45]
Dylan Lewis
We're going to stay in the lane of tech. I'm thrilled that we have a tech twofer here with you on the show today. Tim. Shares of fastly up over 20% in the past week, largely on the news that competitor Egeo has filed for bankruptcy, which leaves Fastly and competitor Akamai as two of the main players in the content delivery network space. This is not exactly a market I am super familiar with, but Tim, I know that this is a company you follow relatively closely. What do you make of this news with a competitor going away and maybe there being a little bit more of that pie for Fastly?
- [13:22]
Tim Byers
It had to happen. I really know nothing about Edge IO, but this is a bare knuckles, low margin. It's a terrible business. It really is. Dylan, let's be honest. We can be real here. Like, this is a terrible business. Fastly. When I had made an initial recommendation of this, it wasn't because this business was great, the core business, it's that they were moving to another business that was higher margin where it looked like they had an advantage. And I was wrong about that. I was stone cold wrong about that. And so they've really been struggling since. So seeing the market shrink because it's a bad, low margin market is. Yeah, that's objectively good for Fastly. It's good for Akamai. Where does this leave them? I mean, it probably leaves them picking up scraps that are low margin scraps, but maybe gives them a slight edge in pricing power because there are fewer providers now. Like, one way to get pricing power is your competitors go away and leave you, as you know, the sole supplier. They won't be. Akamai is a huge company, but it does give them a little Bit of an advantage to just explain what content delivery is. So a content delivery network is the road network. It's the superhighway above the streets. If the streets is the core Internet, the superhighway is the content delivery network. You get places faster because you get on the on ramp and boom, off you go. No more stoplights. Right. That's, that's what a content delivery network is. And, and Fastly is very good at this. They don't have many of these superhighway networks, but they have enough and they do have some good customers who have been with them for a while. But you might imagine that superhighways and toll roads are like, that's great. If you can get people on the toll roads, you just can't charge very much for the toll roads. So it's a low margin business. So what you want to do is have stops or ways to take it, like special tunnels or through ways that people can pay a lot extra to go through. That's what Fastly was trying to do with what's called edge computing. They haven't got there yet. Akamai is kind of a specialist in these superhighways. They do some other things as well. They're a big company, they're growing slower. It's the first company I recommended in Motley Fool Rule Breakers. I'm sad to say I gave up on it way too soon. The first recommendation was a winner. The second one wasn't and I don't own it anymore. But it's the first real winner I had at the Fool, Dylan. So I'm glad to see they're still around.
- [16:07]
Dylan Lewis
You know, Tim, having just driven from Washington D.C. to New Jersey for the holidays, I will contend that there is a business in super fast highway tolls, maybe just not digital ones. I was paying plenty to make that trip. But as you note, it's a much lower margin business on the digital side. I think one interesting wrinkle for me with this is I understand some of the enthusiasm for Fastly shareholders, sure. But Akamai secured edgeo contracts in content delivery and in cybersecurity as part of the bankruptcy court proceedings. They also have some licensing rights related to some of the companies patents as well. And so it feels like perhaps the short term competitive environment for Fastly gets a little bit easier. But they are now going up against an even stronger competitor who, as you noted before, much larger than they are and I think have a little bit more of a diversified business as well.
- [17:05]
Tim Byers
They do. They've been competing against Akamai for years. And just their network design is different. And they would argue better. Akamai would argue not better. But, you know, you could choose, if you're a tech, you could choose which one is better. One is, you know, Akamai really started by just putting servers everywhere. There was an Internet service provider. They just flooded the market everywhere with servers. Fastly said, well, you know what we'll do? We'll just go to the fastest points and we'll put our equipment there. And so if we're at the fastest peering points we can do, we don't need to be everywhere if we're at the fastest points. So we're good. So it's just a different network design. It'll be interesting to see, I think, for a lot of this, Dylan, when you're talking about moving content quickly, which is largely, I mean, the way Akamai started, just for perspective here it was, hey, you know what? We want to show streamed movies. And in order to show streamed movies, we should have copies of those movies close to where people are going to click the play button. And so that's really what it was, just creating copies, like throughout the world. So whenever somebody, like in Des Moines clicks play, the server that is, you know, like five miles away is going to be the one that serves that content. That's. That's the idea here. And that's kind of a commodity business now. But you're not wrong. We'll see how this plays out. It's maybe a more friendly market, but it's still a commodity market.
- [18:56]
Dylan Lewis
So to wrap us here, I came to you with two kind of tech underdog stories. With intel and with Fastly today. Are either of them interesting for you as potential turnarounds?
- [19:08]
Tim Byers
Intel, for sure, is absolutely interesting to me. Fastly. If they ever find their way into really building a highly competitive edge computing product, I will get interested again. I still own shares I haven't sold yet. But intel, with that Foundry business, I. I haven't done a firm valuation. So take this with a grain of salt here, Dylan, but just eyeballing it, I think most investors would agree that if you buy intel today, you're getting the Foundry business for close to free because it doesn't do anything yet. So if it ever does do something, then there's real value there. But it's value that intel has to build. So it's highly speculative, but it's at minimum an interesting speculation because they're not going anywhere.
- [20:10]
Dylan Lewis
Coming up, we're sticking with tech. What's your Data worth Ricky Mulvey talks with Dave Hatter, a cybersecurity consultant at Entrust IT, about the surveillance capitalism model where your digital data winds up and which companies take better care of your privacy than others.
- [20:34]
Ricky Mulvey
Today's show is brought to you by the Range Rover Sport. What makes a leader? It's a tough question, but one thing's for sure, a true leader leads by example and a true leader takes risks. They plunge into life with determination and face obstacles with resilience. For those who lead by example and approach life with a palpable passion, there's the Range Rover Sport. Visceral, dramatic, uncompromising, the Range Rover Sport offers focused on road performance and world renowned off road capability. Its adaptive dynamics reduce unwanted body movements to deliver smooth and composed handling. Plus its adaptive off road cruise control monitors ground conditions and acclimates to the present terrain. Its agility, control and composure are achieved with dynamic air suspension. The Range Rover Sport is a comfortable and intuitive drive. Sophisticated refinement meets visceral power in the Range Rover Sport. A new dimension of sporting luxury. Rise to every occasion and visit LandRoverUSA.com to configure your Range Rover Sport.
- [21:40]
Dave Hatter
Dave Hatter is a cybersecurity consultant for Entrust IT and someone who is concerned about the amount of data that Big Tech is harvesting from him, me and you. Is that a fair description for you? Dave?
- [21:51]
That is an excellent description, Ricky. I'm very concerned about it.
- [21:54]
There was a quiet story last month that you sent over to me and I think it's interesting to talk about. This is from Cybernews reporting that there is a bug in Google's Pixel 9 phone, its new phone, that makes it say basically that users cannot say no to Google's surveillance. And the researchers found, quote, the Pixel device continuously sends personally identifiable information, including the email address, phone number and location to various Google endpoints, including device management, policy enforcement and face grouping, end quote. So the phone is sending this stuff about every 15 minutes. Why is this a big deal? I got Google Maps on my phone. It knows where I'm at.
- [22:34]
Yeah, Ricky. So first off, understand that I've been in the business for more than 30 years, spent most of it as a software engineer and have built some of these types of systems myself. And my big issue with all of this is not so much that it's happening, it's that the average user a does not give informed consent. Let's face it, you know as well as I do, people don't read the 80 pages of privacy in terms of service and all that stuff, they just click yes because they want to use their devices. So if everyone had a complete and full understanding of what they were signing up for and chose to do it anyway, I'd be a lot less concerned about it. And then the second part of that, why you as a person should be concerned, is since you probably don't really understand what they're collecting, how often they're collecting it, who they're sharing it with, how it's being monetized for their benefit at your expense, potentially it's the downstream impacts of how this could be used against you. There are all kinds of, quote, AI companies out there now who buy and sell this data from data brokers, plug it into their algorithms and then claim to be able to do things like look at your data and determine would you be a good renter, would you be a good employee, would you be a good insurance risk? So there are companies out there using this data that's being collected about you in ways that you don't know. There's no transparency or visibility into it. So when you get denied for a credit application or you get denied for a job or for an apartment you want to rent, you won't even know why. At least with a credit score, you have some visibility into it. There's some transparency. You can dispute things on your credit record here you have no visibility. And as we get more and more technology in our lives, as everything becomes software driven and software is embedded into it and there's enormous value in collecting this data, of course there's only going to be more of it, which creates an ever larger and more detailed and granular profile of you that people can use. So that's. Those are the fundamental reasons why I care about this.
- [24:22]
We've gone from a phone taken in email address and phone number to dark credit scores. Dave, at a baseline, I mean, I think Google would say that they need it for. What is it car crashes we can track. If you've been in a horrible accident.
- [24:37]
They always have legitimate reasons. And I'm not even disputing that some of the services that require your location data aren't legitimate and provide value. If you've been in a car crash and your phone can report that, could it save your life or the lives of your family? Yeah, possibly. So again, I'm not necessarily against these things per se. It's the fact that people don't really understand what they're signing up for. I always encourage people check out like Mozilla's privacy not included. Mozilla makes the Web Firefox browser. They have a website called Privacy Not Included where they dig into the privacy aspects of software and services and such. And I think if most people took a look at that, the expose they did last year on modern cars and the unbelievable amount of information any new model car is collecting about you, stuff that has nothing to do with. Well, you know, I get that there are sensors in cars, you know. Right. And that they provide value to you because they make the car operate better or whatever. But almost every major car manufacturer is collecting all the information out of your infotainment center. You connect up your phone, they got all that, they're collecting all kinds of stuff about you. And again, do you really understand what's being collected? Do you really understand that they're potentially listening to the conversations you're having in the car? No. And that's my problem. It's the lack of transparency. It's the fact that people are not giving informed consent to this incredibly detailed, ingrained in our data collection.
- [25:55]
And smart TVs are also kind of similar where they're watching to see when you, when you tune out and when you tune back in sometimes. You mentioned data brokers. How is Google monetizing this data?
- [26:05]
So when you look at a company like Alphabet, the parent company of Google, or Meta, the parent company of Facebook, and you look at where most of their revenue comes from, which is all public because they're publicly traded companies, what you're going to find is the vast majority of their revenue comes from basically collecting your data and then using it to provide services to you or selling that data. So, for example, you know, think about it. Other than Pixel phones and the Android operating system, what can you buy from Google? Almost nothing now. I mean, you know, you can pay for some of their services if you want to move out of the freemium model into higher tiered stuff, Google Workspace and that sort of thing. But generally speaking, the free stuff is a surveillance capitalism model. You're not paying with money, you're paying with data. You are their product, not their customer. Again, I'm not necessarily against that. It's the trade off that people don't understand. So they collect enormous amounts of data about you. The more of their services you use, the more data they collect. Again, same thing for Meta. What can you buy for Meta? Almost nothing, right? I mean, you can pay to advertise on their services, but mostly you use their free products, they collect your data, they use that to sell you ads, and they sell that data potentially to data brokers and other similar services, you know, and obviously generate billions of dollars a year primarily from your data.
- [27:21]
And I think at least in the case of Facebook Meta specifically, people understand that trade off. They go on Instagram and they see, they see their friends photos and then there's also an understanding that that comes with sponsored content and ads as well, especially YouTube. I'm watching a video, I know that it's tracking the videos that I'm watching and serving me up ads, probably based on my interests. And in fact it asks me is this ad relevant to you? And I always say no. But it's, it's, it's pretty clear that that's going on. I understand the trade off that I'm making. I know you got a bone to pick with Alphabet and Google, but is, is Apple any different? So I, we talked about the Google Pixel phone collecting all this data and Apple has made part of their branding. We're all about privacy. We're putting user privacy at the center. It has a better reputation. But you're deeper into this world than I am. Do you think that reputation around privacy is well earned?
- [28:07]
I think it's partially well earned and here's why. Yes, Apple is collecting your data. Same for Microsoft. Right. But if you look at of all the big tech companies that are out there, they all have their issues. I'm not a fan of any of them to a large extent. But when you look at a company like Apple for example, or Microsoft, their business model is different. Right. Apple is in the hardware and software business primarily. Now again, I'm not going to pretend like they're not collecting your data, Ricky. They certainly have the capability and I'm sure they are. But at the moment their business model is not fundamentally driven by your data. They're selling you hardware and software. Microsoft more software based. Yes. They're collecting your data. Could they turn around and sell it at some future point? Would my opinion on Apple and Microsoft change potentially depending on that? Yes. But at the moment, and again, there's some privacy washing going on on both of their parts as well. But generally speaking, I feel strongly and I feel safe to say that Apple is a much more privacy friendly company primarily because their business model is different. They're not incentivized to collect and sell your data to generate all their revenue. They're selling you products and they've, I.
- [29:16]
Mean they've been doing this for a few decades now. Protected data. Well so far. So I'll hope the Lindy effect stays in action. The longer they protect data, the longer that they will. Tim Cook's done a pretty good job there. You mentioned data brokers. And I want to make it clear for listeners who don't know. So we've talked about Google and how they're monetizing it. That end, I think people are less familiar with, with data brokers. One of them is Experian, which is also in the credit reporting business that has something like you mentioned, where you can see your credit score and they track that and sell that to different lenders and things. But how else are these data brokers make making money? Who are they selling my personal information to?
- [29:53]
Well, in my mind, data brokers are a big, a big part of the problem that we have with privacy and security today. So let me, let me connect up a dot and then come back and try to answer your question. Specifically, just in the last couple of months, we've seen some gigantic data breaches. Companies like National Public Data and MC Squared, these are background check companies that are buying your data. You're giving your data up when you go through a background check. And think about this for a second, Rick, if you've gone through a background check process, and I'm sure everyone that's watching this has at some point for a job or something, think of the incredibly sensitive information that you're giving up. Places you've lived, places you've worked, your family members, right? Lots of sensitive information, you know, and then when they buy and sell this data with other companies and build ever larger, ever more granular profiles about you, not only does that data have intrinsic value to people that want to sell you things or people that want to persuade you, it has really enormous value to bad guys. Because if your data gets leaked, whether it's stolen or inadvertently leaked or whatever, and now I have all of this sensitive data about you, it makes it really easy to impersonate you from an identity theft standpoint and or to impersonate an agency or organization you've worked with in the past to send very realistic and very authentic phishing, emails, texts, et cetera. So one of the reasons why this data broker thing and this data collection troubles me so much is Once it's out there, 23andMe they're not a data broker, but a lot of people gave up their DNA data. They're potentially going to go out of business. What's going to happen to the data? The very. You can't get new DNA, right, Ricky? You know what's going to happen to that data when they go out of business? So when you think about these sometimes shadowy third party companies that many people have never heard of, buying and selling data between each other, selling it to third party companies that have some end use in mind, whether it's advertising to you or whatever it is. Then they go out of business, they sell it to someone else. Even if you sign up for something and you have fully informed consent and you understand what you've bargained for when that company goes out of business, what happens to your data? So there's this shadowy network of hundreds of companies around the country. And because there's no national privacy law at this point, you know, many of them, while they may be impacted by the 18 states that have some sort of privacy law, it's a real patchwork quilt of varying regulations and varying, you know, penalties. To a large extent, it's like the Wild west out there. They can do whatever they want with this data. It's hard for you to know what they have. It's hard for you to get it erased. It's hard for you to, you know, make changes to it if it's incorrect. And as more and more of that moves around from one company to another about you, again, it could be incorrect. You can't see it. You don't know. You don't know that you're potentially being penalized as a result of data that might not even be correct. So there's again, I know a lot of this probably sounds crazy to many people, but when you look at the totality of the incredible amounts of information and very detailed granular things like going back to Google Maps, you know, if you turn that on on your phone, basically, if you can go into your Google history and look at the map and you'll find like every place you've been for a long time, you know, there's all kinds of different ways this stuff can be used against you.
- [33:11]
Dylan Lewis
Listeners. This is the first in a two part conversation with Dave Hatter. We'll play the second part later this week. As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards and is not approved by advertisers. Motley fool only picks products we personally recommend to friends like you. As always, thanks for listening. We'll be back tomorrow.