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Friday Morning Roundup: Intel, IBM and Instacart

A slew of mixed fortunes across the tech industry.
(StockStudio)
(StockStudio)
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Intel’s new CEO said the chip giant would outsource more production, as it posted results from a “challenging yet lucrative year” and addressed challenges it will face in the post-Covid-19 world, WSJ reports.

A Quick Snapshot:

  1. Intel posted record annual sales of $77.9 billion, an improvement over last year’s $72 billion and just ahead of Wall Street’s $75.4 billion expectations.
  2. In 2020, net income landed at $20.9 billion, which is a slight decline from 2019’s $21.1 billion.

IBM pledged to return to revenue growth after suffering a 4.6% decline in 2020 as “corporate customers’ focused on preserving cash during the coronavirus pandemic,” WSJ reports.

Numbers To Consider:

  1. IBM’s latest quarterly revenue was $20.37 billion, a 6.5% drop. Fourth-quarter profit fell to $1.36 billion from $3.67 billion the year before.
  2. However, the firm expects the business to grow beyond the pandemic’s uncertainty and “anticipates $11 billion to $12 billion in adjusted free cash flow for the year and $12 billion to $13 billion in 2022.”

Instacart is planning to cut rough 1,900 in-store shopping jobs says a letter released by the company, WSJ reports.

Why It Matters: Instacart is shifting toward an approach where its gig workers fulfill and deliver orders to streamline the process. It’s been trending this way since the company starting doing so in 2018 and now has fewer than 10,000 people in strictly in-store shopping roles.

  • Hastening the process is the preference of some retailers to fulfill their own orders and just use Instacart on the technology side.
  • It’s a small move within a larger problem — while Instacart has “gained ground” during Covid-19, some of its customers have said they can’t make money with the tech platform’s commission costs.

A Number For You: Instacart raised another $200 million in October, valuing the company at around $18 billion.

Justin Oh:

If Intel ($INTC) is able to turn itself around back to profitability, it would be against fierce competition for the chip market it once dominated. 

Intel has uniquely been both a chip designer and manufacturer. 

  • Most chip designers are fabless, which means that designers like AMD ($AMD), Nvidia ($NVDA), and Qualcomm ($QCOM) create chip designs and then hand it off to a semiconductor foundry to manufacture. 
  • There are only four major foundries in the world: GlobalFoundries, Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, and Intel. 

Intel’s problems are many-fold.

Intel basically missed the huge revenue opportunity in mobile processors.

  • It historically underinvested in mobile processors, always focusing on speed and eschewing power management. 
  • What saved Intel during this time was the concurrent growth in cloud computing and its dominance in servers built on its x86 processors.

Now, it’s suffering from the fact that competing chips are eating its market share in both PCs and datacenters.

  • TSMC ($TSM) has grown into a dominant manufacturer on the backs of huge mobile volumes and its openness. In fact, they just announced they’re spending up to $28 billion in capex, which will just expand its commanding lead in its chip process leadership.
  • Competing chips designed by AMD, Apple, and others that are built on TSMC’s 5nm process, are now even faster than Intel on desktop. 
  • Even cloud providers like Amazon ($AMZN) are investing in their own chip designs.

It looks like Intel has given up on manufacturing leadership and is going to outsource more production to TSMC to focus on design. 

If they can’t succeed in a turnaround, this could be a value trap.

  • At $59 per share, $INTC is trading for 7.9x EBITDA and carries a 6.5% free cash flow yield, which is very cheap in today’s market. 
  • But they are “on the ropes”, so to say, and fighting their way back to success will be a tough road ahead. 
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