Five years ago, Boeing and Intel were pillars of the U.S. economy. For many years, both companies had delivered superior returns to their shareholders. Before COVID-19, Boeing’s shares traded at over $400. This week, Boeing has traded around $156 a share. The story is similar for Intel. In 2019, Intel’s shares traded above $60. Now the stock is trading in the low $20s.
While Boeing and Intel’s share prices have dropped like lead weights, the S&P 500 stocks have gained 60% on average since 2019. The two stocks’ underperformance relative to the benchmark index is dramatic and disturbing. What happened to these two icons of the economy?
To start, both companies are victims of terrible management decisions, but the specific reasons each company is a fallen stock market angel are different.
Boeing’s failures can be summed up in just a few sentences. Management became arrogant as the company battled its only competitor, Airbus Group, for global dominance of the commercial aircraft market. Boeing’s management thought the sky was truly the limit for corporate profits. After all, the commercial aircraft industry is a pure oligopoly that is supply-constrained. Both Boeing and Airbus have massive order books which are measured in years. But Boeing focused on profits, not manufacturing safe planes. In its haste for profits, Boeing rushed the 737 Max 8 to the commercial market. The company had orders for 5,000 planes, but the new Max 8 flight control system called MCAS was prone to failure. That tendency to fail led to two fatal crashes.
From those two tragedies, the unraveling of the Boeing image and the Boeing stock price began. Boeing tried to bully the Federal Aviation Administration into concluding that MCAS was safe, but the system was not safe. Boeing put profits before safety. To compound the engineering error, Boeing alienated its workforce. That matters because manufacturing a large commercial aircraft is complex and requires highly skilled labor. Boeing’s backlog is measured in years. Consequently, Boeing has pricing power. It can pass costs through to its customers. Labor is a small part of the overall cost of a Boeing plane, but Boeing squeezed its workers. Now, Boeing workers are on strike.
Boeing will be fixed, however. The new CEO is an engineer. He will fix manufacturing issues. He will reach a settlement with the workers. It will take a few years, but the Boeing company and the Boeing share price will fully recover from the poor decisions by prior management.
By contrast, the future is not bright for Intel. Management did not foresee how Nvidia would change the global semiconductor industry almost overnight. Intel placed its bets on the central processing unit semiconductor architecture. Nvidia chose to go the graphic processing unit path. With GPUs, computations are conducted in parallel. Nvidia’s GPU architecture enables significantly faster processing performance. The artificial intelligence revolution is powered by Nvidia’s semiconductor designs. The hyper scalers of the U.S. technology industry are deploying billions of dollars in Nvidia’s semiconductor technology. Intel has been left behind in the AI revolution.
Intel management failed to see the potential in parallel processing, and shareholders are paying the price. It is an open question whether Intel will ever again be an important competitor in the global technology market.
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The lesson: Great companies can never rest. Product measured by the moment, both in reliability and quality, matters most.
Those who fail to master this lesson will fail their shareholders, customers, and workforce.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected]