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Oh how the mighty have fallen.

Once the king of all coffee sellers, Starbucks has stumbled on hard times. 

In fact, the whole of 2024 had been pretty much a disaster for the company.

The company reported a first quarter rise in revenue — but fell short of expectations by over 2%. To top that off, they slashed their guidance for 2024 from 10-12% to 7-10%.

Then in Q2 they reported revenues actually fell by 2% and further slashed guidance to the low single digits.

Q3 had to be the icing on the cake…  Revenues fell for the second straight quarter with the company basically predicting its sales slump wouldn’t end anytime soon.

The company’s CEO Laxman Narasimhan did his best to smooth things over making statements like:

“In a highly challenged environment, this quarter’s results do not reflect the power of our brand, our capabilities or the opportunities ahead.”

Founder Howard Schultz wrote a lengthy piece where he offered a more practical suggestion

One of their first actions should be to reinvent the mobile ordering and payment platform—which Starbucks pioneered—to once again make it the uplifting experience it was designed to be.

I don’t know how “uplifting” an online app can be, but the company had been experiencing issues filling orders from it. At least Schultz’s suggestion was aimed at something concrete.

Either way, the market wasn’t buying it.

By the time they had reported their third quarter earnings (July 30) the company’s share price had collapsed nearly 22% by reporting time. The time for some dramatic change had come.

On August 13, in a surprising turn of events, CEO Laxman Narasimhan was dumped in favor of a new boss — Brian Niccol, former CEO of Taco Bell and Chipotle.

Niccol came with a pretty remarkable track record. According to the AP:

When Niccol arrived at Chipotle in 2018, the Mexican chain was reeling from multiple food poisoning outbreaks. Five years later, its annual sales had nearly doubled.

The stock jumped nearly 25% the day of the announcement.

Starbucks (SBUX)

Source: Barchart

Apparently the market thinks he’s the solution. But what’s really the problem?

A Victim Of Its Own Success?

Much of the discussion so far has focused on the company’s service.

There’s no doubt that Starbucks has been a leader in the coffee arena. Some 50 years ago, when Starbucks first opened its doors, coffee was coffee. As Starbucks brought the “coffee house vibe” to life, however, it also brought a series of new coffee creations. 

Espressos. Lattes. Cappuccinos. Frappuccinos. Macchiatos. Mochas. Flavors and blends of every kind.

According to founder Howard Schultz, Starbucks’ baristas have to be able to make around 100,000 different variations of drinks. 

Drinks are iced, blended, foamed, shaken and flavored. Starbucks lists 11 different kinds of creamers and milks on its U.S. website.

Customers can even specify the number of flavor pumps or the amount of caramel drizzle they want in their beverage. 

It’s easy to see how all this creativity can lead to issues with customers getting served in a timely fashion. 

Phil Kafarakis, the president and CEO of the International Foodservice Manufacturers’ Association has suggested that Starbucks needs to streamline its menu options to fix the problem. 

That may well be. But the problem is, taking away what consumers have gotten used to rarely goes over well. (At least in the beginning.)

But beyond all this, there’s another more fundamental problem that the company is facing.

Consumers are Tapped Out

Earlier this year, the Wall Street Journal ran the headline:

Source: The Wall Street Journal

Now, some consumers are hitting their limits. Restaurant chains and some food manufacturers are reporting sliding sales or slowing growth that they attribute to consumers’ inability—or refusal—to pay prices that are in some cases a third higher than prepandemic times.

This is a particular problem for a company that brands itself as a luxury item for the masses. (At a Manhattan Starbucks, a medium Pumpkin Spice Latte is now almost $8.)

The problem is coffee is a commodity, plain and simple. 

Starbucks has always excelled at transforming that commodity into a customer “experience.” But today, when the customer experience has become “this costs too damn much” you’ve got to acknowledge it.  

Brian Niccols officially took over duties as Starbucks’ CEO in early September.

And he’ll undoubtedly get his grace period as CEO. It’s even possible that the August pop may continue for a bit. 

But in the end, Niccol and Starbucks are ultimately going to have to deal with a consumer base that’s getting squeezed harder and harder by economic conditions. 

If they don’t, the “Niccol jolt” will wear off like any other caffeine buzz.

It’s a legacy that’ll likely end up being studied in grad school business books for years to come. 

But whether it’s a story of success or failure remains to be seen.

In its 50-plus year history, Intel has gone from the world’s dominant semiconductor chip producer to verging on the edge of failure.

Not necessarily a reputation you like to hang your hat on.

In our last post, we said the government tends to make bad decisions when it comes to spending investing your money. Early this year, Intel put in and received the promise of a big chunk of Chips Act money to help build new fabrication and research facilities in Arizona. 

If only $20 billion were the solution to all Intel’s problems.

The Big Arizona Bet

By way of a little background, Intel has committed to building two state-of-the-art fabrication plants (known as “fabs”) in Chandler, Arizona that will employ the company’s latest chipmaking process known as “18A.”

Source: Intel

That number describes a 1.8 nanometer-class chip that would effectively compete with the 2nm and 3nm chips currently produced by Taiwan Semiconductor Manufacturing (TSM) — the world’s biggest contract fab. 

Intel’s plan is to further compete with the likes of TSM by splitting their business into design-side and the manufacturing-side entities. CEO Pat Gelsinger explained In a recent company memo:

A subsidiary structure will unlock important benefits. It provides our external foundry customers and suppliers with clearer separation and independence from the rest of Intel. Importantly, it also gives us future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation.

Some prospective customers have taken note.

Amazon Web Services recently cut a deal with Intel to co-invest in a custom chip design based on the 18A platform for its servers. The deal was “a multi-year, multi-billion-dollar framework,” according to the press release.

On paper, this all sounds like a step in the right direction. Except the road ahead is anything but smooth. Fortune recently reported:

Meanwhile, costs for Intel’s planned Arizona fabs and two more in Ohio have soared past initial projections. The Arizona plants, which Intel is counting on having online in 2025, have been hit by construction delays. 

Which has impacted the availability of $20 billion from the Chips Act: 

In March it was awarded $8.5 billion in direct CHIPS funding and $11 billion in loans. But the money is tied to Intel hitting certain construction milestones, and it has yet to receive any funds.

And if that wasn’t enough…

And in September, Reuters reported that Broadcom, which makes networking and radio chips, had tested Intel’s process and concluded it was not yet ready for full production.

According to the WSJ: “Intel’s manufacturing arm is money-losing and hasn’t gained strong traction with customers other than Intel itself since Gelsinger opened the factories to outside chip designers three years ago.” 

Completing the business split and getting the new fabs into production are critical for Intel’s future success. 

White Knights to the Rescue?

Just two weeks ago, rival chip manufacturer Qualcomm approached Intel to discuss a possible takeover. 

Intel’s stock popped. Qualcomm’s took a hit. 

That’s because the deal would be a major financial stretch for QCOM. 

The deal would be valued significantly above the amount of cash Qualcomm has on its balance sheet and would require taking on significant debt or diluting the company’s shareholders. This deal is viewed as a longshot at best.

Not long after the Qualcomm news broke, Apollo Global Management approached Intel with another offer to support their turnaround efforts: 

Bloomberg reported, citing sources familiar with the matter, that Apollo recently proposed an equity-like investment of up to $5 billion to Intel’s management. The people said Intel execs were mulling over the proposal. There were no definite, as the investment could change or fall apart.

And there’s more good news coming from the government…

The Biden-Harris Administration announced today that Intel Corporation has been awarded up to $3 billion in direct funding under the CHIPS and Science Act for the Secure Enclave program. The program is designed to expand the trusted manufacturing of leading-edge semiconductors for the U.S. government.

This is a DoD targeted program that’s separate from the other $20 billion that’s stuck in limbo.

Can They Be the Comeback Kids?

Intel has a history of being on the wrong side of industry trends. (Like when it opted not to provide Apple with chips for its iPhone and ignored its GPU division as Nvidia was making inroads into the AI trend.)

Yet there’s always hope to right the ship. 

Meta managed to do it — with a disciplined program of slashing costs and refocusing on its core business — after a disastrous investment in the metaverse that cost them three-quarters of their market cap in a little over a year.

But can Intel?

Given their history in the chip business, they’ll certainly be a stock to watch…