Nvidia rival Intel’s journey from Hero to Zero in two decades
For many of the readers of this article, Intel may be an unknown name. But back in the 1980s when the PC was launched by IBM, it was Intel’s computer chips that were the computing engine and the memory inside. Its famous 8088 series were in advertisements everywhere. It was as famous as Nvidia is today, as a brand standing for phenomenal computing hardware.
However, unlike Nvidia which designs its microprocessors, but does not manufacture them — Intel prides itself being an Integrated Device Manufacturer (IDM), i.e. it not only designs its chip’s architecture (Fab in industry jargon) it also is good at the manufacturing process (foundry in industry jargon).
However, last year Intel earned an operating income of only $93 million on revenues of $54 billion! And its market capitalisation has shrunk to around $95 billion from a peak of $300 billion in 2000s, whereas later entrants into the chip market like Nvidia boast trillion dollar valuations.
Source: Intel annual financial statements
In the last four years its stock has given up almost two-thirds of its value. This is the story of its decline and the decisions that led to that decline.
Intel stock price (since IPO in 1971) in US$
(Source: Google Finance)
Intel’s origins
The company was founded by Gordon Moore (who coined the famous Moore’s law that the number of transistors on a computer chip would double each year — and it did for a time!) and Robert Noyce in 1968. Both of them were ex-employees of an even more pioneering firm, Fairchild Semiconductor.
In its initial years, Intel was a maker of computer memory chips for large computer manufacturers like IBM. It launched the first commercially available microprocessor, the 4044, in 1971. Competition from Japanese manufacturer’s in the memory chips market led to its commoditization and forced Intel to pivot in the mid-1980s to developing microprocessors to support the then nascent personal computer market which was led by IBM.
It was only in the 1990s after Intel partnered with Microsoft (coined as the “Wintel” partnership, a portmanteau of Windows and Intel) which enabled Microsoft’s Windows operating system to run better on Intel’s x86 range of microprocessors. The graph below shows the growth of the Personal Computer market in those two decades and most of that growth powered Intel’s own meteoric 12,000% growth in stock price until 2020 (refer graph above).
(Source: International Data Corp., Wikipedia, Gartner)
A little bit about microprocessors
Microprocessors (aka computer chips) get faster with more transistors installed in them. Transistors are a fundamental component of modern electronics, such as smartphones and computer chips. Each transistor acts as a switch, and a computer acts by switching these transistors to on or off positions, i.e the binary code that underlies computer programming.
Each transistor thus allows a microprocessor to do more calculations. The original Intel microprocessor from 1971, the 4004, had about 2,000 transistors. Now Intel’s chips have billions of transistors. Semiconductor companies fit more transistors on chips by shrinking them. The size of the transistor represents the “process node.” Smaller numbers are better.
The original 4004 used a 10-micrometer process node (for reference, nanometers are 1,000 times smaller than micrometers, which are 0.001 mm or 0.000039 inch). Now, TSMC’s best chips use a 3-nanometer process. Intel is currently at 7-nanometers. Engineers, especially at Intel, took pride in regularly delivering smaller transistors.
The iconic Andy Grove
András István Gróf, or Andy Grove as he was more famously known, was a Hungarian refugee to the US who was Intel’s third employee and eventually succeeded Moore as CEO in 1987 until 1998 right around the time of the PC revolution hitting the world.
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Andy is famous for developing the Objectives & Key Results methodology and in 1997, Time magazine chose him as “Man of the Year”, for being “the person most responsible for the amazing growth in the power and the innovative potential of microchips”. During his tenure as CEO, Grove oversaw a 4,500% increase in Intel’s market capitalization from $4 billion to $197 billion, making it the world’s 7th largest company, with 64,000 employees. Intel’s stock price peaked just a few years after Andy’s departure as the PC revolution started to falter.
So what went wrong?
While Andy’s focus and zeal led to Intel totally dominating the phenomenal growth of the personal computer industry, he initially dismissed the personal computer user as a hobbyist. However, he did later build the Wintel partnership and for the better part of the 1990s, Intel’s Pentium x86 chips were operating in a tick-tock manner — Every two years, Intel would release a chip on a new process (tick) and in the subsequent year, it would refine its design and technology (tock). This led to more powerful software tools being developed as microprocessors became more powerful leading to an ever increasing demand from new PC users, and as well existing PC users seeking to upgrade their now obsolete machines.
Andy was succeeded as CEO by Dr. Craig Barrett, who had the misfortune of having to lead Intel through the technology bubble bursting in 2001 and the subsequent recession that dampened demand for PCs (see graph above). Those years slowed down Intel’s relentless pace of innovation in desktop microprocessors which were also being commoditized, while the world of computing was morphing from desktop computers to mobile laptop computers that needed microprocessors that were stingy users of energy to conserve the battery life.
The smartphone misstep
Craig was succeeded by Paul Otellini who oversaw in 2006 laying off 10% of Intel’s workforce (almost 10,500 jobs). He pushed Intel to develop less energy intensive microprocessors to be able to keep up with the growing market for laptop computers. While he was able to convince Steve Jobs to switch to Intel chips for powering Apple’s Macintosh computers in early-2000s, he was unable to convince Apple to use Intel chips for its new iPhone range launched in 2007. Otellini later admitted to making a major miscue in the mobile market. Those devices were mainly built using chip technology developed by ARM Holdings, which drew much less power than PC chips and was licensed to multiple manufacturers that competed on price and features. Over time, sales of smartphone units totally eclipsed those of desktop or laptop computers (refer graph below).
However, Otellini managed to get Intel to dominate the chips that ran large data centers to feed the growing Internet applications like Facebook and Amazon. Still, Intel’s revenues grew from $38 billion to $53 billion.
Paul was succeeded by Robert Kranzich in 2013. Robert was a big believer that Intel should diversify out of the microprocessor business and into the emerging area of data. He invested in China and also in chips supporting data centers. Robert was ousted by the discovery of a relationship with a subordinate in 2018.
(Source: IDC Worldwide Quarterly Mobile Phone Tracker, Counterpoint Research reports, Strategy Analytics market data).
By this time, Apple was well on its phenomenal iPhone revolution and smartphones needed smaller and very energy efficient microprocessors — very different from desktop or even laptop microprocessors. And, Apple turned initially to Samsung as a provider of such microprocessors equipped with the ARM design, then eventually bought a small microprocessor design firm in 2012 (P.A Semi which specialised in low-power chips). It began designing its own chips that were manufactured by Taiwan Semiconductor Mfg. Co. (TSMC) which rapidly grew as a leading foundry and was able to reduce the process node size of its transistors below 3 nanometers (nm) and Intel was at best able to produce 7 nm. So Intel was locked out of the smartphone chips business, and sales of smartphones exceeded PC sales as the device became ubiquitous across the world.
The AI mistep
Robert was succeeded by then CFO, Bob Swan, in 2018. However, a small microprocessor chip startup called Nvidia had been quietly making Graphic Processing Units (GPUs) in the late-1990s primarily for the video gaming, which required very fast microprocessors to make its game visuals appealing. It continued its focus on that market for the next twenty years. In late-2010s, Nvidia entered the world of designing microprocessors to service the nascent Artificial Intelligence (AI) industry because its GPU architecture was very well suited to that industry’s fast processing needs. Intel, with its focus on CPUs, had long ignored the gaming industry as a niche business.
During 2018, the company had the chance to buy a stake in OpenAI, then a fledgling non-profit research organization working in a little-known field called generative artificial intelligence. They discussed various options, including Intel buying a 15% stake for $1 billion in cash. They also discussed Intel taking an additional 15% stake in OpenAI if it made hardware for the startup at cost price. However, new CEO Bob Swan did not think generative AI models would make it to market in the near future and thus repay the chipmaker’s investment. OpenAI was interested in an investment from Intel because it would have reduced their reliance on Nvidia’s chips and allowed the startup to build its own infrastructure, two of the people said. The deal also fell through because Intel’s data center unit did not want to make products at cost.
Bob’s tenure also saw delays in execution of Intel’s plan to upgrade its foundry business to sub-7nm where its competitors operate with impunity. That resulted in his ouster by activist investors during 2021.
These two critical pivot points and the decisions taken by Intel senior management during those times have resulted in Intel’s decline during the past few years.
Latest CEO
Whether current CEO, Paul Gelsinger, who took over from Bob Swan in 2021, and has been in the role for three years now is able to bring Intel back to its legendary status is still a story to watch. He has split the company into the Fab and Foundry businesses in an attempt to revive them and is making an effort to catchup on the AI revolution.
(This article is for informational purposes only and is not an invitation to invest in securities. The views reflect those of the author and not of the institutions he is affiliated with.)
Sources:
Grove, Andy. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Crown Currency, New York, ISBN 0385483821
Clark, Don, Paul S. Otellini, Who Led Intel and Saw It Grow Even More, Dies at 66. New York Times, October 2017
Cherney, Max. How chip giant Intel spurned OpenAI and fell behind the times. Reuters, August 2024
Dylan, Martin. Analysis: How Nvidia Surpassed Intel In Annual Revenue And Won The AI Crown. The Channel Company, February 2024
