Intel's Risky Gamble Turns Into a Big Mistake

It's never a good time to spend a lot of money fixing problems that have been around for years. That's especially true for Intel Corp.

Although the timing couldn't be worse, we have to move forward.

Intel's fourth-quarter results late Thursday showed the company's worst annual decline since the dot-com bubble burst in 2001. Revenue for the year fell 20%, driven by shrinking sales in its two key businesses: personal computers and data centers. Both businesses got worse as the year progressed, resulting in fourth-quarter revenue and adjusted operating income coming in below Wall Street's forecasts.

Intel also set a new record for capital expenditures in the year, totaling $24.8 billion. This represents an increase of 33% from the previous year, and is a significant sum for a company that typically spends in the midteens billions of dollars. This figure also represents a significant portion of Intel's revenue for the year, at 39%. Capex typically represents less than 20% of the company's top line, so this is a significant increase.

Intel announced its plans to increase spending last year in an effort to regain its competitive edge in advanced manufacturing technology. The company also plans to build out its foundry business, which manufactures chips designed by other companies. This comes as Intel is coming off a record year of sales, as consumers and businesses snapped up extra PCs during the pandemic. Meanwhile, tech giants who have seen pandemic-driven gains are pouring billions more into their data center investments.

The PC sales slump has been hard on Intel, with the company projecting a 40% year-over-year revenue decline in the first quarter. This would be the worst drop since at least 1992, and Intel has even declined to give a projection for the full year due to the uncertainty created by the slowing global economy. Intel's stock price has already lost more than one-third of its value over the last 12 months, and was down around 7% Friday.

Advanced Micro Devices is not the only chip company experiencing difficulties; Intel is also expected to report a slowdown in revenue growth for the fourth quarter. However, AMD's problems are mainly due to economic conditions beyond its control, while Intel's problems existed even before the current industry slump.

Mr. Gelsinger warned then that a turnaround would take years. But worsening economic conditions are putting even more obstacles in the company’s path—and might be leading to some difficult choices.

Credit Suisse analyst Chris Caso wrote Friday that Intel will need a “V-shaped recovery” in the second half of this year to avoid continued cash burn, which in turn could put the company’s dividend at risk.

Intel maintained Thursday that it is committed to the dividend, but Mr. Caso noted that “we also know the company’s manufacturing plan is immovable, which could force tough decisions if a recovery from the current inventory correction is either muted or delayed.” Intel’s pain is far from over.