Intel CEO Pat Gelsinger suffered his latest setback on Tuesday after the IPO of his Mobileye subsidiary proved to be a great idea that was sadly long past its prime.
Due to report quarterly earnings on Thursday, the former tech bellwether has fallen on hard times and reportedly plans thousands of layoffs as demand for personal computers following the pandemic is once more on the decline.
Gelsinger had hoped to float shares of the autonomous driving technology firm Mobileye at a valuation of around $50 billion, but demand fell far short of plans and expectations were lowered twice as a result.
The Israeli startup founded by CEO Amnon Shashua was purchased for $15.3 billion back in 2017 by former Intel CEO Brian Krzanich. Now, five years later, shares will start trading on Wednesday at an initial valuation of only $16.7 billion–an annual return of just 1.8% on the original deal.
Below are three key reasons why the IPO failed to deliver for Intel.
When Krzanich penned the deal, he had presided over a steep decline at Intel during which its fabless rivals were eating its lunch. These companies chose to outsource chip production to foundries like Taiwan Semiconductor Manufacturing Company (TSMC).
U.S. competitor AMD ate into Intel’s core PC business; Qualcomm seized control over the booming smartphone market that prizes chips that go easy on battery life; and Nvidia cleaned up in the area of high-end graphics processors for everything from video gaming to crypto mining.
In this context, Intel’s Mobileye deal was little more than a strategic punt to be first in a future market it estimated to be worth $70 billion, and came just as premature euphoria over self-driving technology reached its peak.
There was no natural fit between the two, and hence little justification why Intel would be best placed to run the Israeli company.
While they enjoyed some cross-selling opportunities, there were precious few technological or manufacturing efficiencies that could be gained by housing them under the same roof. Importantly, the Israeli startup has long designed its own proprietary silicon based on a RISC-V architecture rather than relying on Intel’s competing X86 standard.
When Intel CEO Gelsinger told reporters in December he was planning to take Mobileye public, he admitted things wouldn’t much change since the links were thin to begin.
“We operate Mobileye quite distinctly from the rest of Intel to give it the speed and pace of operation,” he said at the time.
Gelsinger took over at Intel early last year with a mandate to rebuild its expertise in semiconductor fabrication, so cashing in on a tech market bubble made sense at the time.
He needs billions to develop logic chips with bleeding-edge five-nanometer node sizes and below to compete with TSMC.
The timing seemed perfect. Just prior to Gelsinger’s announcement of the Mobileye IPO, Amazon-backed EV manufacturer Rivian had gone public in mid-November in the biggest IPO since Facebook and quickly gained a market cap that saw it eclipse General Motors and Ford in value after delivering only a few dozen trucks.
Had Mobileye been taken public then, when chip shortages were acute and countries were outbidding each other to win investment in new fabs, Intel would have likely met with an avalanche of demand.
Unfortunately, investor appetite has since swung in the opposite direction, with the Nasdaq Composite trading near two-year lows.
Making things worse, semiconductor stocks, once the talk of the town, have taken an absolute beating as geopolitical tensions added to bearish sentiment. The Biden administration has recently signaled it will go to extreme lengths to prevent high-tech chips from ending up in the hands of China.
For several years, auto industry stocks have traded at or near historically low valuation multiples. This poses a problem for even a leading supplier of computer vision technology like Mobileye, as ultimately the bulk of its business is selling componentry for driver assistance systems to incumbent carmakers under pressure from the likes of Tesla.
While it’s true that Porsche was able to pull off a $10 billion IPO, it trades as a luxury branded goods maker like Ferrari, thanks to its iconic brand. It also boasts a list of investors that includes a wealthy family willing to fork over billions to secure a veto and a number of sovereign wealth funds that lined up in advance of the IPO subscription period.
As Jefferies autos analyst Philippe Houchois told Fortune at the time, parent Volkswagen Group could have closed the order book on the very first day.
Even so, while the Porsche IPO raised every penny of the cash VW had hoped for, it failed to live up to expectations in one key element that is also pertinent to Intel and Mobileye. VW management believed that by creating a transparent market price for the company’s stake in Porsche, it would show just how undervalued the parent was: Instead, VW’s market cap has since sunk below its diminutive 75%-controlled subsidiary.
Intel had likewise hoped the value of its investment in Mobileye would be better appreciated once its shares floated on the market. As Mobileye begins trading today, however, Intel’s shares were set to open lower.
Finally, investors will not have liked the fact that the IPO proceeds will largely go to Intel. On Tuesday, Mobileye said a “significant portion” of the roughly $800 million in net proceeds will be used to repay debt owed to Intel. Investors typically want to see the money reinvested in further growth.
This story was originally featured on Fortune.com
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