Intel’s new CEO Pat Gelsinger has a tough job ahead of him. What it means for action

Text size

Just over twenty years ago, Pat Gelsinger became

Intel‘s

first head of technology. The engineer won the distinction after leading the design of the pioneering 486 computer processor and earning the respect of CEO Andy Grove, who mentored him for years.

However, Gelsinger did not get Grove’s best job. After 30 years at Intel (ticker: INTC), he left in 2009. Now Gelsinger is back, with the job of CEO he presumably wanted. He takes over from Bob Swan on February 15th.

Gelsinger has his work cut out for him. When Intel reports fourth-quarter earnings on Thursday, the chip giant is expected to generate a massive annual profit of nearly $ 21 billion in sales of $ 75 billion. But analysts predict falls in 2021. A number of manufacturing problems at Intel have allowed rivals

Advanced micro devices

(AMD) i

Nvidia

(NVDA) to participate in key chip markets.

Shares of Intel fell 17% in 2020, although the PHLX Semiconductor benchmark rose 51%.

In November, close to the 2020 minimum, De Barron argued that Intel still had a lot of value and could reclaim its mojo with new ideas and bold new management. Since our article, shares have risen nearly 30%, compared to a 5% gain in the S&P 500 index. Intel shares have been driven by a pressure campaign by activist investor Daniel Loeb, which demanded a significant change on Intel’s board in late December.

Gelsinger’s appointment is a step in the right direction. His technical experience clearly contrasts with the financial background Swan brought to the job.

Dan Niles, a long-term chip investor and portfolio manager at the Satori Fund, says Gelsinger’s appointment reminds him of Satya Nadella’s CEO promotion to

Microsoft

(MSFT). “My belief for tech companies, for any company, is that it’s important to have someone in the company’s DNA,” Niles says. Since Nadella became CEO in 2014, Microsoft shares have returned 576%, compared to the S&P 500’s return of 149%.

At the same time, Gelsinger brings the advantages of an outsider. He spent three years as chief operating officer of EMC before becoming a pioneering director of software

VMware

(VMW) in 2012. Understanding both software and hardware engineering has become critical to the success of the chip industry.

Moor Insights & Strategy analyst Patrick Moorhead, who worked at AMD during Intel’s Gelsinger tenure, describes him as a tough competitor, a good performer, and someone capable of motivating people. “That’s what Intel needs,” he says.

Gelsinger’s most pressing issue will be addressing Intel’s manufacturing issues. For a company that has long insisted on doing things at home, there is no easy solution. Atomic accuracy, huge capital costs, and competition for the best talent make it a lifelong process.

When it comes to the most advanced chips, Intel is already far behind the manufacturing power

Taiwan semiconductor manufacturing

(TSM), which builds chips for AMD and Nvidia as well

apple

(AAPL). Gelsinger will have to decide whether to tackle Intel’s global focus on chips and outsource more work to a manufacturer like Taiwan Semi. This has become Wall Street’s preference in recent months.

One of Swan’s significant final acts at Intel will likely be a manufacturing upgrade during the company’s earnings call on Thursday. After that, Intel’s future is in Gelsinger’s hands. The good news for Intel investors is that they are probably the best person for the job.

Write to Max A. Cherney to [email protected]