Intel's weak position in AI chip market leads to mass layoff

Intel has suffered a significant setback in its vision of becoming a leading AI chip supplier.

On Thursday, Intel said it will cut $10 billion in capital expenditures in 2025. To achieve that number, the company plans to cut by the end of the year 15,000 jobs, or 15% of its workforce of roughly 110,000.

"This is painful news for me to share," Intel CEO Pat Gelsinger said in a letter to employees. "I know it will be even more difficult for you to read. This is an incredibly hard day for Intel as we are making some of the most consequential changes in our company's history."

Intel's annual revenue in 2020 was $24 billion higher than in 2023, yet the company's workforce is 10% larger today, Gelsinger said in his letter. To reduce its head count, Intel plans to roll out a retirement offering for eligible employees and offer an application for voluntary departures beginning next week.

Driving the reduction in Capex is the need to align expenses with sales that have failed to meet Wall Street expectations. The company reported second-quarter revenue of $12.8 billion, down 1% year over year. Intel forecast revenue of $12.5 billion to $13.5 billion for the third quarter of 2024, substantially less than Wall Street analyst expectations of $14.3 billion. Intel also expected a loss of 3 cents per share versus analyst expectations of a profit.

Pat Gelsinger

Those numbers introduced a new reality to Gelsinger.

"We're clearly tempering our view on how fast we can grow in the near term based on market conditions," he said during an earnings call with investors.

Intel, once the global leader in chipmaking, has fallen far behind competitors. Nvidia, the leading supplier of AI accelerators, doubled Intel's revenues in its last fiscal quarter, a 262% increase year over year. AMD, which competes with Intel across many of its chip products, reported $5.8 billion in revenue for the second quarter of 2024, up 9% year over year. It has a market capitalization of nearly $100 billion more than Intel.

The drag on Intel's turnaround is its failure to feed the hot AI market that has driven growth at Nvidia and AMD. Intel's Gaudi processor hasn't been well received by cloud providers, the largest buyers of AI accelerators.

"AI investment is sucking up a lot of buying decisions as the market readjusts to the new world of AI models and training," said Jack Gold, principal analyst at J.Gold Associates. "Intel does not have a significant capability in that space."

Intel's performance in its traditional market of PC CPUs was positive last quarter. Revenues from PC makers grew 9%. However, the company reported a 3% drop in sales of chips for data center servers.

Intel's growth in the PC market has been driven by the introduction of AI PCs, which are primarily laptops with specialized chips to run AI applications. However, that growth hasn't brought the profits Intel expected.

"An ironic silver lining of the news is that the AI PC market is doing better even than Intel expected, because they're selling more Intel Core Ultra CPUs than they thought they would," said Bob O'Donnell, principal analyst at Technalysis. However, the chips carry "little or no margin."

Within the AI market, Intel is unlikely to show much progress until companies start building AI applications that run at the edge of corporate networks, where Intel CPUs with built-in AI accelerators could gain a strong foothold.

"If you're buying big on AI [today], you're going to move toward Nvidia and AMD," Gold said. "Intel will have a trailing share in that part of the market, at least until we move toward a more edge-leading AI processing environment."