Will Intel Stock Keep Going Up By Cutting Costs?

Key Takeaways

  • Intel is expected to announce targeted layoff of thousands of its employees in November.
  • In response to layoff rumors, the company’s stock price has risen.
  • Historically, companies announcing layoffs have underperformed the market in the long run.

If you follow tech news, you’ve probably heard that Intel, one of the world’s largest chip makers, is planning to cut thousands of jobs through ‘targeted’ layoffs. The greatest impacts will likely occur in the sales and marketing departments.

Layoffs leave people without jobs, forcing them to find new sources of income. And they are typically viewed as a sign of distress for a company, with the perception being that the business is trying to save money that it can’t afford to spend on staff.

However, cutting costs could be good since it may help boost the business’s profits and its stock price. We’ll cover what you need to know about Intel’s layoffs and how they might impact the company’s stock price.

What’s happening?

In the past week, reports have surfaced that Intel plans to cut thousands of jobs through layoffs. The expectation is that Intel will officially announce the move next month around the time of its third-quarter earnings presentation to investors.

Intel employs 121,000 people, so laying off thousands of workers means cutting multiple percent of the business’s staff. Reports indicate that the worst-impacted parts of the business, including sales and marketing, could see as much as 20% of workers laid off in these departments.

This is Intel’s first major layoff since April 2016, when the company cut 12,000 jobs (roughly 11% of its workforce) on the day it announced its earnings.

These reported layoffs come under the leadership of Chief Executive Pat Gelsinger, who took over the company in 2021. Since then, he’s focused on rebuilding the company to its former station at the leading edge of chip manufacturing by building more manufacturing capacity.

Why is Intel laying off staff?

Layoffs typically don’t happen because a company is in a good financial situation, Intel will not be the exception. The layoffs are partly due to incredibly diminished demand for computers (and chips, by extension, Intel’s core product line).

In July, Intel revised its sales forecast for 2022 from $79 billion to $67 billion, a decrease of more than 15%. Other tech companies also saw major declines in sales during the summer, indicating that this is an industry-wide slowdown rather than one that only impacts Intel.

Additionally, Intel has failed to claw back market share from some of its competitors, such as AMD, which has seen its market share significantly increase over the past five years.

The layoffs are a reversal from previous years when the pandemic caused a surge in demand for computer parts while simultaneously making production more difficult. Intel faced a shortage of workers and invested in building out more production capacity.

With the chip market slowing down, Intel likely faces a situation where it planned for high levels of demand and staffed accordingly, only to find itself with too many workers for today’s demand.

Are layoffs good or bad for stock prices?

Layoffs are generally a bad sign for a company financially, but that doesn’t necessarily mean they’re always detrimental to stock prices.

Laying off workers means saving on wages, benefits, and the other costs of employing people. Depending on the size of the layoffs, they can mean significant savings for a company.

If the layoff only impacts a percentage of the company and allows the business to keep operating according to current demand, it could be the best thing for the company to do to ensure future profitability.

Conventional wisdom for management is that layoffs are a necessary evil during economic downturns. Often, stock prices will rise in response to layoff announcements. However, in the long term, layoffs tend to lead to decreases in stock prices.

A paper published in the Strategic Management Journal analyzed stock prices of American and Japanese companies at and after they announced layoffs. It found that American firms experienced abnormal returns of -1.78%, while Japanese firms had abnormal returns of -0.56%.

In other words, companies announcing layoffs tended to perform worse than similar businesses that were not laying off staff.

The impact layoffs have on a stock’s price depends on surrounding factors. How many people are losing their jobs, what portions of the business are experiencing cuts, how the business plans to move forward, and the overall economic outlook all come into play.

For example, a business announcing a simple 25% workforce cut is unlikely to fare as well as a company that announces cuts in an underperforming part of the business and a commitment to refocus on its successful product lines.

What will happen to Intel’s stock?

Predicting the future of a stock’s price is a lot like looking into a crystal ball. Even with all the information, you can never be sure whether it will rise or fall and by how much.

First word of Intel’s layoffs came on October 11th. That day, Intel’s stock opened at around $25 per share. Since, the stock has risen to $26.97, an increase of 7.88% compared to the S&P 500’s approximately 2% increase over the same period.

Given the stock’s greater gains than the broader market, investors seem pleased by the announcement. This means there is potential for the stock to continue gaining value, especially when Intel officially announces layoffs and describes its plan for moving forward.

Bottom Line

Intel is expected to officially announce these layoffs in November. While its stock has risen in response to leaks about the layoffs, history shows that businesses going through layoffs tend to underperform the market.

Investors will need to listen closely to Intel’s official announcement to decide whether this presents a good opportunity to invest. Instead of trying to track all of these swings over time, you can invest in a Q.ai Investment Kit, like the Value Vault.

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Source: https://www.forbes.com/sites/qai/2022/10/23/intel-layoffs-will-intel-stock-keep-going-up-by-cutting-costs/