Investor Check-In: Intel, Amazon, and Microsoft

In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:

• Intel‘s three focuses for turning things around: its foundry business, AI strategy, and cost structure.
• The real reason Amazon might be pushing workers to return to office five days a week, and why Andy Jassy is looking to reduce bureaucracy.
• Microsoft‘s new buyback authorization and dividend hike.

Motley Fool host Alison Southwick and personal finance expert Robert Brokamp look at how Gen X saves and how to catch up if you’re feeling behind.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 17, 2024.

Dylan Lewis: Big Tech in focus in a big way. Motley Fool Money starts now. I’m Dylan Lewis, and I’m joining over the airwaves by Motley Fool analyst Tim Beyers. Tim, thanks for joining me today.

Tim Beyers: Thanks, Dylan. Fool-caffeinated, ready to go. Lot to get to.

Dylan Lewis: Yeah, a lot to get to. Anytime I have you on the show, I always want to talk tech, no shortage of tech stories for us here today. We have an updated plan from the Intel CEO, we have an update on Amazon’s new work policy, and we also have some new ways that Microsoft is allocating capital, all that to dig through. Why don’t we kick off with what’s going on with Intel CEO Pat Gelsinger, pending a letter to employees after the recent board meeting and updating the path forward for the beleaguered company. Three main focuses here, Tim, the foundry business, improving the cost structure of the business, and the company’s AI strategy. Where do you want to start with this one?

Tim Beyers: Well, I think we have to focus on the collaboration with Amazon Web Services. In this letter that Gelsinger wrote, he said, “We have expanded our strategic collaboration with Amazon web services, and it includes a co-investment and custom chip designs. There’s a multi-year multi-billion dollar framework covering product and wafers from Intel.” In other words, Intel wants to be a manufacturer of record for the custom chips at AWS wants to build for its AI business. I find this fascinating. Here’s the piece that I think is really interesting. Intel Foundry, so this is the foundry business. This is a big piece of the business that just isn’t a contributor right now, Dylan. They are going to produce.

This is according to Intel, an AI fabric chip for AWS on Intel 18A. We need to spark for a second on what it means when Intel says 18A, 18A is the most advanced process at the moment that Intel can use for manufacturing chip sets. What it roughly stands for, because tech companies are not really that imaginative, it essentially reflects that at 1.8 nanometers, which is very small, Intel can make highly advanced chips, 18A, 1.8 nanometers. That is arguably a really good sign. There are some reasons from a business perspective, that AWS needs this, but just to give a little bit of framing on it before we keep moving, Dylan, 1.8 nanometers, that’s roughly at the most advanced level that Taiwan’s Semiconductor is at right now. They’re building chips at around two nanometers. This is Intel getting in the race of saying, look, you can make hot rod chips with TSM, you can also make hot rod chips with us, and AWS is going to be making their hot rod chips with us. That arguably is a very big statement, but obviously, there’s more to it than that.

Dylan Lewis: I think looking at some of the details there they disclosed, that is a multi-billion dollar partnership they are looking at. I think market certainly cheering that a little bit. As part of these announcements, Intel also announcing they’ll be receiving up to $3 billion. I should say, in funding via the Chips Act. The updates from the company broadly excited response for the market. I’m curious, you mentioned that the foundry business has not been a contributor. That was a focus that Pat Gelsinger had in his address to employees. Do you feel like some of these things start to make that business more relevant?

Tim Beyers: Well, this is what the market is reacting to, Dylan. The last time we checked, Intel stock earlier this morning had gotten up to up about 6%. I don’t know where it exists at the moment that we are recording, but the market was reacting very positively to this because the idea is that Intel by virtue of this partnership, will supercharge that foundry business, which has really been nowhere. One of the arguments, if you were going to be an Intel shareholder, you’re going to buy Intel stock speculated on it right now is, you know what are the current valuation? I’m getting the foundry business for free, or even maybe for less than free. Maybe they’re like, actually paying me to take on this foundry business, because evaluation is this cheap. Should I believe that if the foundry business can contribute anything, that this becomes a significant value play. You seem to have institutional investors say, here it is, we’ve been waiting for it. We’ve been waiting for this business to contribute some value, and so therefore, Intel is instantly more valuable today than it was yesterday. Now, that is a somewhat dubious claim. I’ll put it this way, Dylan.

What I would expect this deal does for Intel is it gives them the possibility, not necessarily the guarantee, but the possibility being a very big reference account. What I mean by a reference account is, it’s reassurance to the rest of the market. It says, look, you didn’t know whether or not you could trust Intel to build your most advanced chips, have we got good news for you, Amazon trusts us to build their most advanced chips. Now, that is incredibly valuable. There’s a principle in long term tech marketing. There’s a book from 1993 that expresses this beautifully called crossing the chasm. This idea that in order to gain momentum, you need to prove by virtue of some proof that your early adopters actually are going to be able to show other mainstream buyers that you can be trusted. They can pull you across this chasm of skepticism that says, I see who you are. I see that you can serve a really brilliant reference customer, I’ll trust you, too.

That’s the expectation here, Dylan, that Intel is getting an incredible reference customer that reassures the market, pulls more business into Intel foundry. Now, what does Amazon get in return for that? I’m going to tell you, I bet that Amazon is getting incredible terms for this. They’re getting great pricing, they probably have first choice on all capacity in Intel foundries. It’s probably a really good deal financially for AWS. Long term, if this is a good reference account, it’s good for Intel foundry.

Dylan Lewis: It makes sense to me that the market would be cheering any positive sign. In this case, several billion dollars of potential positive signs for Intel, given that shares are down about 50% year to date. One thing I did want to ask you about sticking with the foundry business. They also announced that the foundry business will be operating as an independent subsidiary within the company. What do you think of that move?

Tim Beyers: I think it’s important because Intel for years has had its own factories for building its own chips. Intel building Intel chips to sell into devices that have Intel chips. Intel being its own manufacturer, and that’s been an integrated business, the reason you separate these out is so that the Intel foundry business can be independent. You can trust that, hey, look, if you happen to get reserve the capacity, and you pay the fees, you’re getting in line, including getting in line in front of us, in front of our own business to build our own chips. Intel foundry has to be independent in that sense. Yes, I think that’s a very good move. If you want to get third party business, you have to prove that you are a verifiable trusted third party provider, you have to be like Taiwan semiconductor in that sense.

Dylan Lewis: Tim, putting a bow on this one before we go to our next topic, the foundry business has been a growth lever. People have wanted to see from Intel. We’re starting to see a little bit of signs here. Is this something you are still waiting to see manifest?

Tim Beyers: I’m more hopeful today. I would love to see this play out, but the things I’m looking for Dylan, now, the next thing I’m looking for is, now that we have Amazon as a reference account, who are the next set of partners or customers that Intel can announce? If those start to come within, let’s say, six months to a year from now, and they look lucrative and they look big, and it does feel as though Intel is starting to pull its weight as a competent second supplier to TSM, it’s going to make a big difference. The market is hungry for this, Dylan. This is no accident. The market is hungry to have an alternative supplier to TSM, but we need to see some evidence that others will trust Intel to be a second supplier.

Dylan Lewis: Intel not the only tech company with its leader giving employees an update this week. Amazon CEO Andy Jassy letting the team there know that the company will be making some changes to how they work. Namely, beginning in early January, the expectation for employees will be that they are at the office five days a week, and the company will also be looking to reduce layers and the number of managers, relative to individual contributors. A little walking and org structure there, Tim. What do you make of this?

Tim Beyers: It is, but it has a couple of implications, doesn’t it? It is Amazon. Let’s take the good first. The good is that Amazon recognizes that they have to move faster and eliminating bureaucracy is one way to move faster. Fair play to Andy Jassy and recognizing that and making some moves here. I do think that makes some sense. I also think it does make some sense that collaboration in person is easier than collaboration over Zoom. It’s just harder when you have a dramatically distributed workforce to have spontaneous collaboration and some of the spontaneous collaboration that he’s talking about in his letter, it just doesn’t happen as much if you have to structure and have, like, Zoom calls, for example. He wants to see more of that. There’s an argument for it. There’s a dark side to this, Dylan, and we do understand this. He may be saying, and, by the way, we’re too big, and we would love to invite you to leave if you would love to continue being a remote employee.

Dylan Lewis: I was going to say, Tim.

Tim Beyers: Feel like that too.

Dylan Lewis: We have seen some headlines from Amazon employees not exactly thrilled with this. I don’t know that Amazon Corporate necessarily minds that. Anytime I see an announcement like this, I do wonder if it’s headcount motivated or if they are acknowledging that maybe there are efficiencies within their workforce that AI helps them realize that they may not need as big a workforce as they’ve had in the past.

Tim Beyers: They are refusing to say the quiet part out loud, which is that they probably need a smaller workforce. They probably want to move some of their expensive remote employees off of their books, and they would like to have more people collaborating close together because they genuinely do believe that there are benefits to serendipitous collaboration when people are working, particularly people across different teams working in close proximity. By the way I think both things can be true here. I think Jassy can be right that collaboration does benefit when you have people working in close proximity, especially people from different teams working in close proximity. I witnessed that myself. We have the benefit of that here on Motley Fool Live every week, where Tim White and I do This Week in Tech.

That is the byproduct of Tim and I working in close proximity in Colorado for years. That never would have happened if we were a Zoom based organization from day one. I do think Jassy has a point on that. On the other hand, Dylan, I think they’re just refusing to say the quiet part out loud. This is absolutely a move that can create natural attrition. The downside, and the thing that I think investors are going to want to know is, what does this do to Amazon morale because when you do stuff like this, it can torch morale a little bit. It’s a balancing act, but I see where Jassy is going with this.

Dylan Lewis: Earlier, you called Amazon the reference customer for Intel. I’m going to ask you, are they the reference company when it comes to these return to work mandates? Because this is one of the more aggressive policies we have seen in Big Tech so far.

Tim Beyers: Probably. I wouldn’t be surprised if they are a bellwether, so Amazon is doing this. You get a bunch of other companies that say, well, we just got a permission structure to bring everybody back to the office, let’s go announce it. We see over the next three months a bunch of announcements about Big Tech companies pulling everybody back into the office wouldn’t surprise me at all, Dylan.

Dylan Lewis: Sticking with Big Tech. Microsoft out with an update on how it’s planning on returning capital to shareholders. The company announcing its board approved a $60 billion share repurchase authorization, and it will be upping the company’s dividend by 10%. Those numbers sound big Tim in the grand scheme of Microsoft’s market cap, not that earth-shattering, not really humongous and needle moving, but I would argue, particularly with the dividend policy, nice to see the company continue to make progress there.

Tim Beyers: No question. I like the dividend policy more than I like the buyback. I wish the buyback went into the dividends, but OK, I’m quibbling there. Part of the reason for that is, Microsoft stock is not cheap. You cannot call it cheap. If you do an honest free cash flow calculation and you strip out all of the share repurchases, all of the dividends, all of the CapEX, all of the stock based comp, you’re still generating over the last 12 months, about $25 billion in free cash flow, which is a lot. Microsoft can afford this $60 billion share repurchase, and they could afford to give a bigger dividend increase. I think the dividend increase is better. I think that would have been the smarter play here.

The difference is, though, Dylan, is if you repurchase shares, you are not creating a taxable event for shareholders. That’s like and I’m doing the air quotes thing here, listeners “Return of capital that is tax efficient.” Maybe. I don’t know. They still issue a lot of share based equity, so take that with a grain of salt, but the dividends do create a taxable event, so it’s less tax efficient, but who cares? I do like that Microsoft has a lot of excess capital. They are going to put it to work in their own way, for the benefit of shareholders. The dividend is the one that I really like the most here, Dylan, because they have a history of raising that dividend. They are sticking with it. It does cost them a lot of money to do it on an annual basis, but they can easily afford it. You know what? They still have excess cash left over even after they hike their dividends here, so it’s nice to see. I just wish less on the buyback, more on the dividend. Maybe switch that ratio a little bit, Microsoft.

Dylan Lewis: I think for anyone who maybe is sneezing at that 10% increase, one thing I will throw out there, increases every year since 2010. When we are doing this show in 2035, and Microsoft is crowned a Dividend Aristocrat®, this is one of those steps along the way that helped get in there. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.)

Tim Beyers: That is a fact. It’s great. I have no problem with anybody who chooses to say, I love that you are paying me an extra dividend, and I’m just going to reinvest that right back into the stock and get me some more Microsoft shares. I think that is an excellent strategy.

Dylan Lewis: Just don’t expect the yield to go up too much anytime soon.

Tim Beyers: No. Probably not.

Dylan Lewis: Tim Beyers, thanks for joining me today.

Tim Beyers: Sounds good. Thanks, Dylan

Dylan Lewis: Listeners, just before our next segment, want to give you a heads up about a live event we’ve got coming up. If you’re in the Denver Colorado area, we’re doing a show with our friends over at Bigger Pockets tomorrow, Wednesday, September 18 at 6:00 P.M at the Denver Press Club. The show is a look at Airbnb as a stock and what it means for real estate investors. We’ll have some networking, and, of course, some time for Q&A. Tickets are $27, and include your first drink. You’ll be sure to drop a link to register in the episode description for today’s show. Coming up. Saving for retirement is tough when you have kids and aging parents to take care of too. Allison Southwick and Robert Brokamp take a look at the state of saving for Gen X and offer some tips on catching up.

Allison Southwick: Hey, Gen X. Maybe you should have spent a little less money on singles and parachute pants because it turns out you’re behind on saving for retirement, but don’t worry, Robert Brokamp has your $2 and some advice for how to catch up.

Robert Brokamp: That, of course, is a reference to the classic ’80s movie Better Off Dead in which a paperboy stalks [inaudible] for the $2 he is owed. I’m happy to say that I have a $2 bill autographed by Damien Slade, the actor who played that boy. Yes, I am a proud member of Gen X.

Allison Southwick: The generation X was born between 1965-1980, which means that the elder Gen Xers among us are pushing 60-years-old. Not only is your name probably Michael, Jason, David, Lisa, Jennifer, or Heather, you are also the first generation to see the phasing out of pensions, and you had to largely self fund your own retirement through a 401K plan. I’m saying this as if I’m not also a Gen Xer myself, which I am. I’m just on the younger side.

Robert Brokamp: You are part of that group that was part of this transition. The first 401K was created in 1981. There were similar plans before then, like the 403B, but that big transition from the traditional defined benefit pension to define contribution plans like the 401K really took off in the mid ’80s. The challenge with these types of plans is that the employees have to figure out how much they should be saving and how they should be investing it and it’s clear that many workers among Gen X have not been saving enough. Making matters worse for some is that Gen X is currently the sandwich generation, raising kids while taking care of their aging parents. A bank rate survey found that 69% of Gen X say they are financially supporting adult children, often dipping into their retirement savings and emergency savings to do so. Meanwhile, their parents are well into their ’70s and 80s with many needing help. The result is that many Gen Xers have to take off work to be caregivers.

Allison Southwick: How ready is Gen X for retirement? Well, to be fair Gen X is a generation of downers and polizers, a my right Bro?

Robert Brokamp: Absolutely.

Allison Southwick: We’d expect them to expect the worst and be all, like, whatever about it. They are staying on brand. According to a survey by Alions, only 62% of Gen Xers say they were confident they could support their lifestyle and retirement. That’s compared to 82% of boomers and 77% of millennials, but what is the reality of their retirement savings and how much does it bite? Trying to get in as many references as I can here.

According to a survey from Schroders Investment Management, 45% of Gen X hasn’t done any retirement planning. Now, depending on which study you’re looking at, such as from Alions again or Trans Merica, Gen X has a median of just under $100,000 saved for retirement. According to the Wall Street Journal, when you look at the median household net worth, which is going to include home equity, when you look at it for Gen Xers between 45-54 years old, it was about 250,000 in 2022, and that’s 7% lower than that of baby boomers at the same age in 2007. That was the Wall Street Journal. Again, looking at inflation adjusted federal reserve data.

When you consider that a Northwestern Mutual survey found, Gen X thinks they need roughly $1.5 million to retire. It sounds like if you’re Gen X, you can’t, you won’t, and you don’t stop working because you clearly don’t have enough money saved, but good news, there are some things you can do to try to make up on ground saving for retirement. Let’s get to it. The first thing you can do is we assess your situation.

Robert Brokamp: You want to find out if you actually are behind and if so, how much you have to save to get on track. There are multiple ways to do this. You can find retirement savings guidelines from folks like Fidelity and TO Price and J.P. Morgan. J.P. Morgan does this thing it’s annual guide to retirement, which is very helpful. You’ll find that you need about 10-12 times your pre-retirement income to retire. You could use a good retirement calculator. My favorite is the CLC XML Comprehensive Retirement Planning Module, which you’ll find online for free. These days, more 401Ks or even financial wellness programs are offering access to a financial counselor for free, so you might want to talk to that person or hire a fee only financial planner who can run the numbers for you, but it’s important to see, are you on track, or are you not, and what do you need to do to get back on track?

Allison Southwick: One thing you are going to have to do though is scrutinize your spending.

Robert Brokamp: For two really important reasons. First of all, of course, you want to look for ways to cut back on your spending so that you can increase your saving, but more importantly, when you look at your retirement, you need to know how much income you’re going to need when you retire. What’s your income going to look like 10 years from now or whatever, when the kids are gone and it’s just you or you and your spouse. You need to look at your budget to project exactly how much you’ll need when you retire.

Allison Southwick: Another thing you can do is reduce your housing expenses.

Robert Brokamp: This is the biggest expense for most Americans taking up about a third of the budget. I know no one wants to be told that they should move or downsize, but if you’re really behind, this might be the best thing for you to do. It could means moving to a smaller house, moving to a lower cost part of your city or even the country, or maybe you want to do something like rent out part of your house. When my wife and I met as young elementary school teachers, I was renting out a room in an attic. She was renting out a room in a basement. It’s a great way to make a few extra $100 each month that you could then put to your savings.

Allison Southwick: Another thing you can do is play catch up with your 401K and IRA.

Robert Brokamp: As you’re looking your budget, maybe figuring out how to downsize your housing expenses, the thing you want to do is take that money and get it into a retirement account. The good news is the older you are you might be able to save more. In a 401K the contribution limit for this year, $23,000, but if you’ll be 50 or older by the end of the year, you can contribute another 7,500 for an IRA that’s 7,000 plus another hundred if you’ll be 50 or older. Not only do you want to get money into your retirement accounts, but you want to treat them well. You don’t want to do some of the things that were mentioned in the Wall Street Journal article that you mentioned previously, Alison. It highlighted what some people were doing and why they were behind. One person didn’t even know where all her retirement accounts were. She lost track of them. Another person, every time he switched jobs, he cashed out his 401K, which costs you in taxes and penalties and lost opportunities, so take good care of your retirement accounts.

Allison Southwick: You can also look to reduce or eliminate debt.

Robert Brokamp: Over the last few months, most interest rates have come down a good bit, and they’ll probably come down even more when the fed cuts rates here sometime this week, but despite that, credit card rates are still near all time highs with the average rate well over 20%. If you have debt at that rate, you want to make it a priority to eliminate as soon as possible. Now if you have debt like a mortgage or a car loan that is maybe in the mid to high single digits, whether you should work to pay that off sooner as a little less clear cut, but I personally love the idea of going into retirement debt free if possible.

Allison Southwick: Another thing you can do is look for ways to boost your income.

Robert Brokamp: Obviously, the more you earn the more you can save, plus a higher income can translate into higher Social Security benefits and retirement because social security is based on your highest 35 earning years adjusted for inflation. How you boost your income is really going to be depending on your situation. It could be that you find out what you need to do, you’re going to raise at your current job. It could be looking for a higher paying job elsewhere, or it could be doing Gigork. Whatever you choose though, use that extra income to boost your savings, not your lifestyle.

Allison Southwick: Another habit you can take is to invest, don’t spend when you come across a little bit of a windfall.

Robert Brokamp: Just make sure that anytime you come up with extra cash, you save it forward time. It could be a tax refund. It could be you finally submit your receipts for flexible spending. It could be a year on bonus, or maybe you just inherit an inheritance, but if you get it, don’t spend it, make sure you immediately invest it.

Allison Southwick: Another thing you can do is to look around. Do you have a lot of stuff? Probably, sell that stuff.

Robert Brokamp: That common formula for homeowners insurance is that a policy will cover your personal possessions up to 50% of the value of your home. If that’s a reasonably accurate estimate of the value of all the stuff under your roof, then you own $50,000 worth of stuff for every $100,000 of your homes value. The questions are, do you need all that stuff, and if not how much would someone else be willing to pay for it? There are some bigger ticket items that you might own, that you at one point enjoyed, but maybe not so much anymore, like a boat, an RV, antiques, collectables. Perhaps it’s time to sell some of that stuff, Craig’s list, Facebook, Marketplace, eBay, wherever, and then invest the proceeds.

Allison Southwick: Here’s a tough one for those parents and grandparents out there, but it might be time to cut off the kids.

Robert Brokamp: We mentioned how the majority of Gen Xers are still supporting their adult child. I get it for some of them, they’re paying off college, and they want their kids to graduate from college debt-free, but the bottom line is if you’re behind in your retirement savings, it’s really time to focus on yourself.

Allison Southwick: Lastly, perhaps one of the most important things you can do is try to find a way to work longer, even if it’s just for a little bit.

Robert Brokamp: This is by far the most impactful thing you can do for your retirement if you’re behind and you’re in the second half or the fourth quarter of your career. A study published in 2018 entitled the power of Working Longer, found that delaying retirement by one year increased after inflation retirement income by 78%. If inflation was 3%, the nominal increase would be 10-11%. That’s just one year. That’s the power of one extra year of saving, one extra year for your portfolio to grow, and delaying Social Security by a year. If you delay it by two to three years, it’s even more powerful or even working part-time for a year or a few before you fully retire can have a huge impact on your retirements.

Dylan Lewis: As always, people on the program may own stocks mentioned, in the Motley Fool may have formal recommendations for or against, so buy something thing based solely on what you hear. I’m Dylan Lewis. Thank you for listening. We’ll be back tomorrow.