Intel: After massive layoffs, is the American 'SMIC' the best outcome?

$Intel(INTC.US) released its Q2 2025 financial report (ending June 2025) after the U.S. stock market closed on the morning of July 25, 2025, Beijing time. Key points are as follows:

1. Core Data: The company achieved revenue of $12.86 billion this quarter, remaining flat year-on-year, exceeding the upper limit of the company's guidance, mainly due to customers stocking up in advance amid tariff uncertainties. The gross margin continued to decline to 27.5%, below the guidance expectation (34.3%). The company recognized approximately $800 million in non-cash impairment and accelerated depreciation charges (related to surplus legacy tools that cannot be repurposed) and $200 million in one-time period expenses this quarter. Excluding these factors, the company's gross margin would have met the company's guidance.

2. Progress on Layoffs and Cost Control: The company's operating expenses reached $6.7 billion this quarter, up 3.2% year-on-year. The company had previously set a target to reduce cost expenditures. The relatively high operating expenses this quarter were mainly due to nearly $1.9 billion in one-time expenses, most of which were related to severance payments from layoffs under the company's restructuring plan.

The total number of employees continued to shrink to 101,400 this quarter. According to the company's target, the total number of employees will be controlled at around 75,000 by the end of the year, with approximately 25,000 more layoffs expected. Due to severance payments and other factors, the company's profit margin will continue to be under pressure in the second half of the year.

3. Business Situation: After Intel adjusted its strategy, it restructured its business disclosure approach. Currently, the company's main revenue still comes from client business and data center and AI, with the two accounting for over 90% of revenue.

a) Client Business: This quarter's revenue was $7.87 billion, down 3.3% year-on-year. Although the company was affected by some customers stocking up in advance this quarter, it still declined year-on-year. Considering the global PC shipments increased by 5.4% year-on-year this quarter, Intel is still losing market share in the PC market;

b) Data Center and AI: This quarter's revenue was $3.94 billion, up 3.5% year-on-year. After struggling to enter the GPU field, the company's current data center business still relies on CPUs, which is not the main track for AI competition. The strategy of prioritizing foundry business under the new CEO also indicates that the company has accepted the fact of being behind. Since it cannot become a leader in the AI track, becoming a foundry partner for AI chips is also a viable option.

c) Intel Foundry Business: This quarter's revenue was $4.42 billion, up 3.2% year-on-year. The current foundry revenue mainly comes from Intel 7, which is mostly for Intel's own products. If the company's process capability can approach TSMC, the external foundry business will become a major driving force for the company in the future.

The 18A process started mass production this quarter ahead of schedule (originally expected by the end of 2025), which is a positive signal. However, since TSMC's 2nm will also start mass production in the second half of the year, this somewhat weakens the attractiveness of the company's 18A. The company will further focus on the early breakthrough of the next-generation 14A, which is also an opportunity for the company to catch up with TSMC.

4. Next Quarter Guidance: Intel expects revenue for the third quarter of 2025 to be $12.6-13.6 billion, with the midpoint representing a 1.8% quarter-on-quarter increase, close to market expectations; the gross margin for the third quarter of 2025 is expected to be 34.1%, still at a relatively low level, slightly better than market expectations (32.9%).

Dolphin Research's Overall View: The key is to enhance manufacturing capabilities during the painful period of layoffs and adjustments.

Although the company's revenue this quarter was better than expected, it mainly came from advance stocking due to tariff uncertainties, and there was no significant improvement from the demand perspective. Even without considering the impact of one-time expenses, the gross margin remains at a low level of around 34%.

The current number of employees has been reduced to 101,400, with a target to reduce to 75,000 by the end of the year. Large-scale layoffs will also generate considerable severance and related expenses, making it difficult for the company's profit margin to improve in the second half of the year.

From an operational perspective, Intel still faces multiple pressures: ① The PC market is under fierce competition from AMD, Apple, and Qualcomm; ② In the data center field, it has lost its dominant position and is continuously suppressed by NVIDIA and AMD; ③ In the foundry business, there is still a significant gap with TSMC.

Intel, in the "painful period of layoffs and adjustments," is certainly not performing well this year. Compared to Intel's recent performance, the market is actually more concerned about the strategic changes brought by the new CEO, Chen Liwu. On the business level, the company has formulated a "non-core asset monetization + foundry business priority" strategy: selling 45 million shares of Mobileye to cash out nearly $1 billion to provide liquidity for the foundry business; and plans to divest 51% of Altera's equity (FPGA and other embedded products).

Progress in Intel's current focus on the foundry business: The company previously expected Q4 2025 for Panther Lake (PC chips) and Q1 2026 for Clearwater Forest (data center chips). Now that 18A mass production has been advanced to the second quarter, it can boost market confidence to some extent. However, recent reports from foreign media have poured "cold water" on the company. It is said that Intel will internally review whether to suspend providing the 18A process for new foundry customers, as the attractiveness of 18A to external customers has declined. With TSMC's 2nm starting mass production in the second half of the year, it will somewhat weaken the attractiveness of the company's 18A to customers, and Intel may focus more on breakthroughs in the next-generation 14A node.

Previously, Intel wanted to enter the GPU track and also wanted to "get a piece of the pie" in the foundry market, but ended up being left further behind in the AI market, with foreign investment banks gradually "unfollowing" the company. With the new CEO, Chen Liwu, taking office and reorganizing the business, the company does not necessarily have to be the leader in this AI frenzy but can also serve as a partner in AI chip foundry manufacturing. Currently, AI chips are mostly handed over to TSMC for foundry production. If Intel can demonstrate similar capabilities, it has the opportunity to secure orders from U.S. domestic customers, leveraging its identity as an American company.

Intel's investment logic mainly lies in "turnaround from adversity." The company's previous "wanting both" approach led to no progress in the foundry business while the CPU base was also eroded, and the company's market value fell from $270 billion to below $100 billion, with the market almost giving the company a "bankruptcy valuation".

After Intel replaced its CEO, it reaffirmed its direction in foundry manufacturing and provided a roadmap for 18A and 14A processes, offering the market an opportunity to reassess. Before the "pie in the sky" lands, the company has already seen some recovery from the bottom in the market.

As the company is a heavy asset company with light asset business, it is currently roughly restored to a 1x PB heavy asset valuation.

Considering the valuations of companies like UMC, SMIC, and GlobalFoundries, the PB of global second-tier wafer foundries is generally between 1.5-2.5x PB. If Intel's external foundry business gradually materializes, even from the perspective of a heavy asset company, the company's PB valuation is expected to further recover.

In Intel's vision, as foundry manufacturing capabilities improve, it will also enhance the competitiveness of the company's own products, thereby facilitating the release of company profits. If the company's vision can gradually materialize, with gross margins returning to above 40%, Dolphin Research will also switch the company's PB valuation back to PE valuation.

From a long-term perspective, the market is more about betting on whether the company can successfully improve its manufacturing process and gain recognition from foundry customers, focusing on the progress of the company's 18A and 14A processes and the acceptance of external foundry. In fact, from the perspective of companies like NVIDIA, Microsoft, and Google, if Intel's process can approach TSMC's 2nm/3nm process and yield, these customers also hope to seek new foundry partners to weaken TSMC's bargaining power in the industry chain, but the premise is that the company's manufacturing process is recognized.

The new CEO's overall approach to Intel of "reducing cost expenditures, divesting non-core businesses, and focusing on breakthroughs in foundry manufacturing" is reasonable, but the company's actual execution and specific realization need to be continuously observed.

More detailed comments, Dolphin Research is continuously updating….

Dolphin Research's Retrospective on Intel Articles:

April 25, 2025, Conference Call "Intel (Minutes): Full-year capital expenditure reduced from $20 billion to $18 billion"

April 25, 2025, Earnings Commentary "Intel: Selling assets with one hand, layoffs with the other, can the new leadership save itself?"

January 31, 2025, Intel Conference Call "Intel (Minutes): Achieving break-even in foundry services by the end of 2027"

January 31, 2025, Intel Earnings Commentary "Intel: Layoffs and cost reductions show results, but growth remains a "tough nut to crack"?"

November 1, 2024, Intel Earnings Commentary "Intel: Can it stand up again after shedding "big burdens"?"

August 2, 2024, Intel Earnings Commentary "Total collapse, Intel's "pipe dream""

April 26, 2024, Intel Earnings Commentary "Intel: The marginalized AI bystander"

January 26, 2024, Intel Conference Call "Intel 3, is it an opportunity? (Intel 23Q4 Conference Call)"

January 26, 2024, Intel Earnings Commentary "Intel: The processor throne is no more, AI battle in disarray"

January 17, 2024, Intel In-depth "Intel: AI PC, the "lifeline" for the "toothpaste factory"?"

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