What’s going on at Intel?

Intel shares have plummeted following reports that the company will lay off 15% of its workforce following a steep decline in revenue and billions of dollars in losses in its chip-making business.

It’s the company’s biggest drop in half a century. As of Friday’s close, shares were trading at $21.48, a price not seen since 2013.

The company has been scrambling to shore up its reserves by cutting jobs and suspending its stock dividend, but even those steps may not be enough to restore the veteran tech company to its once-vaunted industry leadership position as it faces stiff competition from rival chipmaker Nvidia.

Intel’s worst week is actually its worst quarter. That began back in April, when the company revealed in an investor presentation that a series of poor decisions in its chipmaking division had caused it to lose $7 billion in 2023, on top of a 31 percent drop in revenue from 2022. CEO Pat Gelsinger said cost-cutting and other measures would save the company $10 billion in 2025.

Semiconductor technology, essential for everything from cell phones to airplanes, was the foundation of Intel’s business when the company was founded in the 1960s. (Co-founder Gordon Moore proposed Moore’s Law, which states that semiconductors will exponentially get smaller, more powerful, and cheaper over time.) But as the company’s recent announcements show, Intel is no longer the innovation leader it once was.

There are also concerns about the global semiconductor industry. Shares of other major semiconductor companies, including Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung, also fell at the close on Friday, and industry leader Nvidia is reportedly facing an antitrust investigation by the Department of Justice. But Intel is in a particularly difficult position.

This isn’t the first time the company has had to implement cost-cutting measures: Intel carried out mass layoffs in October 2022 after the company’s performance temporarily improved due to the impact of COVID-19.

“In February 2022, they issued revenue targets — and I use the word ‘outrageous’ — that were sky-high,” Stacey Rasgon, a senior analyst at Bernstein Research, told Vox. “They were sizing their company and their investments to match COVID-19 revenue levels, based on the need for technology to enable work from home and remote learning for kids.” But the business collapsed almost as quickly as it rose.

But current CEO Pat Gelsinger took over a business that was emerging from a decade of struggle when he took over in 2021. “When Gelsinger took over, they were in a really tough spot and didn’t have a competitive product to bring to market,” with Jensen Huang’s Nvidia dominating AI tech trends, Futurum Group CEO Daniel Newman told Vox.

Intel’s other big recent bet is its foundry business. It has three facilities in the U.S. and overseas to make semiconductor chips, and others in Asia and Latin America for testing and assembly. But it’s off to a rocky start: Intel declined to invest in cost-effective extreme ultraviolet machines at its manufacturing facilities, for example, and has since had to outsource 30% of its manufacturing to rival TSMC.

“Historically, Intel has been the company that’s been driving the cutting edge,” Newman said. But prior to Gelsinger’s tenure, he said, the company “lagged behind on the transition to AI,” as companies like Nvidia, AMD and TSMC, which make semiconductor chips that can be used to accelerate AI technology, crowded out the market.

Nvidia, in particular, has been a dominant force: As my colleague Nicole Narea has explained , some technical features of the company’s earlier work in gaming graphics cards are well suited to the needs of generative AI, and the company has been betting big on its potential since 2018, long before ChatGPT came along.

The company has built its research and development and mergers and acquisitions strategy to position itself to benefit from the coming AI boom.

“They were playing when no one else was,” Newman said.

Intel is now catching up with its Gaudi technology, but in the meantime, companies that used Intel products are moving away from the company. For example, Apple reportedly switched from Intel processors to its own in 2020 and relied on Google to build Apple Intelligence. Intel is not even a competitor.

Intel will survive (for now) on the cash it has saved from job cuts and a suspended dividend, and it will also be helped by government subsidies from the CHIPs Act and investments from hedge funds like Brookstone and Apollo that have entered the foundry business.

“I think they’re a critical infrastructure company for the U.S. and the world,” Mr. Neumann said. But getting back on track will depend on the foundry business turning a profit.

“Even if they’re second or third behind Samsung, we need to be changing the demands of AI, and no one is going to keep up fast enough,” Neumann told Vox.

But even if Intel were to take second or third place, questions would still remain about AI’s place in tech and society: Does AI need to be more tightly regulated, or is it overhyped?

“In general with AI, people are worried about the numbers getting so big and more people are worried about sustainability,” Rasgon said.

For now, the bright spot in Intel’s current situation is that there is no way out but up.