Intel: A buyback story that bit back

A cautionary tale

Intel (INTC) was for decades the leading producer of semi-conductor chips used for processors in computers and servers. The company had a virtual stranglehold on products that used Microsoft’s Windows operating system and the company and its customers proudly put an “Intel Inside” sticker on their products. Intel still has formidable Fab technology, but has slipped behind Taiwan Semiconductor in terms of its process advances along the path set out by “Moore’s Law” and has been overtaken by NVidia in graphic processing units (GPU’s), now an essential component of Artificial Intelligence (AI) servers in hyperscale data centers. Rival AMD has also surpassed Intel in many product areas including PC processors and server processors.

What happened?

The answer is a sad tale of an old story. Deluded by a belief their process technology was unassailable and dominant market share in servers made the company’s shares “cheap” by many metrics, and with a compensation system that rewarded managers for higher share prices, Intel spent a cumulative $106 billion on share “buybacks” over the past few decades.

Intel’s arrogance did not serve shareholders well. Despite the clamor from many fund managers and brokers urging “buybacks” rather than investments in research and development or expanded Fab capacity, Intel squandered not only over $100 billion but also its lead in its core products. It is not as if Intel didn’t understand the importance of product lead - it even used the term “Core” to describe its range of PC processors as part of its branding.

Now humbled, Intel is contemplating a corporate restructuring that may involve spinning off its Fab business and selling off profitable components like Mobileye to raise money to fund its ambitious capital programs. The $106 billion in buybacks was supposed to increase Intel’s share price and market capitalization. Nemesis is ever present when management’s thoughts stray from excellence in manufacturing into share price management, and in Intel’s case the company’s market capitalization has fallen to less than the $106 billion it “returned to shareholders”.

Of course those billions weren’t “returned to shareholders”, they were paid to people selling their shares, many exiting the company in total, in retrospect wisely, while long term shareholders who were applauding the buybacks while Intel was a profitable and growing tech company are now ruing the day the company decided “buybacks” were a good use of money.

Buybacks do benefit public companies in very narrow circumstances which are:

• Shares are trading at a deep discount to intrinsic value

• The company has such a strong balance sheet that the funds used for buybacks were redundant to reasonable amounts needed to fund the company’s operations and growth, and,

• The company had no more profitable options to deploy the money.

Companies that meet those criteria are rare in efficient capital markets. Companies that short term investors think meet those criteria are legion, since traders think they know everything despite the reality that traders as a class necessarily lose money since the trading creates no value and comes with fees and commissions that the trading group pay to third parties.

I remain bullish on Intel since the company still has extraordinary capabilities, is receiving some government money on the dole called the “Chips Act”
and over time has an even chance to catch up to and possibly surpass competitors in process technology, and has a CEO (Pat Gelsinger) with plenty of scar tissue on the risks of “buybacks” after VMWare (of which he was CEO at the time) was acquired by Broadcom and E*Trade erroneously recorded the cash “buyback” portion of the complex transaction as a dividend rather than a capital gain. Or, maybe he was part of the problem and history will repeat itself, or if not, rhyme.