Why NVIDIA Is a Better Bet Than a Broken-Up Intel
Daniel Loeb

Why NVIDIA Is a Better Bet Than a Broken-Up Intel

Investors finally have a reason to cheer Intel Corp. (Nasdaq: INTC), but not for reasons you’d think. The renewed optimism is due to the potential dismantling of the legendary semiconductor company.

On Tuesday, shares of Intel rose sharply on reports that an activist hedge fund wants to break up the design and manufacturing segments of the integrated company.

It’s a good idea that will not work for several reasons.

Intel built its reputation in the 1970s with shocking microprocessor innovation and a brilliant plan to keep making its products better. Moore’s Law, named for Intel’s co-founder Gordon Moore, promised chips would become two-times more powerful every two years.

In those early years, the San Jose, Calif.-based company could do no wrong. Upstart chip firms built campuses on its flanks just to siphon off engineering talent. Silicon Valley came to be.

But today … Intel has a problem. Moore’s Law is no more. The company is bleeding customers as longtime patrons seek alternative computing solutions. Increasingly, they are turning to silicon that integrates artificial intelligence.

And because of this, one of the companies benefitting tremendously is NVIDIA Corp. (Nasdaq: NVDA).

NVIDIA embraced AI early and enthusiastically. CEO Jensen Huang explained in a 2019 Wall Street Journal report that he believes AI will revive Moore’s Law.

For the past several years he has been carefully putting together a vertically integrated AI computing platform complete with software, GPU and CPU processors and high-performance networking.

Related Post: NVIDIA Acquires ARM Holdings

In November, managers noted that data center sales for the fiscal-third quarter surged to $1.9 billion, up 162% year-over-year.

That business is a legitimate threat to Intel’s stranglehold on data center processors, a category that contributed 32% of its total revenues, according to the latest SEC filling.

Daniel Loeb runs Third Point LLC, an activist hedge fund with a well-earned reputation for getting big companies to bend to his will. In this case, it’s clear Third Point means business. The New York-based fund has accumulated nearly $1 billion in Intel stock.

According to a Reuters report, Loeb sent a letter to Intel’s Chairman Omar Ishrak demanding that the firm address its deficiencies in AI, data center market share losses and human capital flight. Loeb claims many talented Intel chip designers have become demoralized by the status quo.

Breaking up the company is a good idea … just not good enough.

Intel needs to shift gears to defend itself from fierce competitors like NVIDIA. Unfortunately, selling off its chip manufacturing assets alone will not save the firm from ruin.

In a world moving toward chips custom made for the application, its current “one size fits all” strategy is destined to keep failing.

For example, in 2019, Microsoft Corp. (Nasdaq: MSFT), Apple Inc. (Nasdaq: AAPL) and Amazon.com, Inc. (Nasdaq: AMZN) announced they were ditching some Intel processors for bespoke chips designed in house. Amazon Web Services, the largest public cloud computing company by sales, will start switching processors at its data centers away from Intel’s power hungry x86 chip architecture in favor of ARM-based designs, the same family of instruction sets that power iPhones and Androids. NVIDIA announced plans in September to acquire ARM Holdings for $40 billion.

Related Post: Steer Clear of Advanced Micro Devices

The Third Point news is an opportunity for Intel shareholders to flee what looks like a sinking ship. Managers at the activist fund have a good track record, Reuters notes, of pushing stubborn boards of Prudential Financial, Inc. (NYSE: PRU), Yum! Brands, Inc. (NYSE: YUM), Dow Chemical and United Technologies into restructurings, and ultimately higher share prices.

Savvy shareholders should sell into the strength and consider buying NVIDIA.

With a market capitalization of $321 billion, NVIDIA is now the largest semiconductor firm in the country, an important currency for doing future acquisitions and attracting engineering talent.

The Silicon Valley company is also in the best position to benefit from the transition toward AI computing and power sipping ARM architectures.


 

Shares have been consolidating since August. At $517.73, the stock trades at only 44 times forward earnings. That’s a bargain considering the pace of its data center sales growth.

Best wishes,

Jon D. Markman

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