8:30 PM ET 11/13/20 | Dow Jones By Max A. Cherney Steve Jobs had made significant progress at Apple since returning from exile in the late 1990s. The iPod was disrupting the music industry, and Mac computers were once again winning fans with user-friendly designs and fun, bright colors. But by 2005, the Mac still lagged behind rival computers in terms of performance. Jobs eventually turned to the one company that could help. "Our goal is to provide our customers with the best personal computers in the world," Jobs said at the time. "And looking ahead, Intel has the strongest processor road map by far." Over the next two years, Apple (ticker: AAPL) turned its entire Mac lineup over to Intel chips. Sales of Mac computers nearly doubled, setting the stage for the iPhone launch and Apple's meteoric rise. The partnership also cemented Intel's (INTC) status as the world's top chip maker -- even Apple needed its help. Until now. This past week, Apple announced three new Macs that jettison Intel processors in favor of Apple's own in-house designed chips. Apple touted the move as a sign of innovation. For Intel, it was symbolic of the company's gradual decline. The company's road map no longer leads the industry. In fact, industry insiders and analysts say its manufacturing process is at least two years behind Taiwan Semiconductor Manufacturing (TSM), the world's largest maker of semiconductors. The company makes chips for many of Intel's rivals, including Advanced Micro Devices (AMD) and Nvidia (NVDA), which design but don't fabricate chips. The so-called fabless model has become the preferred approach for investors, who no longer see much value in Intel's soup-to-nuts model. Intel has indicated a willingness to try new things, and investors expect the company to announce a hybrid manufacturing approach in January. "What has changed is that we have much more flexibility in our designs, and with that type of design we have the ability to move things in, and move things out," CEO Bob Swan recently told Barron's. "And that gives us a little more flexibility about what we will make, and what we might take from outside." For now, though, investors are stuck in the present. Intel's stock is down 20% over the past year because of the continued delays in moving toward a new, smaller transistor process. In chips, progress comes down to size, measured in nanometers, the tiniest of increments. Taiwan Semi has already made the move to five nanometers, while Intel has been stuck at 10 nm and is struggling to make the transition to 7 nm. Last month, Taiwan Semi said that mass production of its 3 nm chips was targeted for 2022. Intel's 7 nm process, meanwhile, has been pushed out to at least late 2022. The manufacturing slips have punctured Intel's supremacy. "From early on, they may not have always had the best design for microprocessors, in my opinion, but they were always one to two process generations ahead," says Dan Niles, founder and portfolio manager of the Satori Fund, a tech-focused hedge fund, who has owned Intel off and on over the years. "They would make up for a design with a process generation that enabled them to produce a chip that ran twice as fast." At its Mac event this past week, Apple repeatedly cited the performance advantages of its new M1 chip over existing processors. The event didn't help perceptions around Intel. "This moment has been brewing for years now, and the new Apple silicon is both shocking but also very much expected," wrote tech industry review site AnandTech. "Intel has stagnated itself out of the market, and has lost a major customer today." Meanwhile, AMD and Nvidia, once an afterthought to Intel, have benefited from their manufacturing relationship with Taiwan Semi and Samsung Electronics (005930.Korea), as Intel sticks to its in-house manufacturing strategy. AMD is gaining share in the market for PC and server chips -- and its stock has soared 80% this year. Intel, at less than 10 times expected earnings for the next 12 months, trades as if it's the next General Electric (GE) -- a manufacturing leader in steady decline. But Intel isn't GE, and there are already signs of the chip maker's rebound. The stock is a rarity in techland -- cheap, with better days ahead. Despite its engineering stumbles, Intel still makes 80% of the computer processing units, or CPUs, used in personal computers, according to Mercury Research. More importantly, it has a 94% share of CPUs in servers, the computers that power data centers and the cloud. And while the company has fallen far behind on its product road map, industry experts note that Intel's 10 nm products are not as far behind as the naming convention may suggest. In technical terms, Intel's 10 nm chips have roughly the same number of transistors found on Taiwan Semi's 7 nm products. The company is forecast to have $75 billion in revenue this year, up 5%. Its profits alone -- Wall Street expects net income of $20.7 billion this year -- are more than double what AMD is expected to generate in sales. Swan points out that Intel has added roughly $20 billion in annual revenue over the past five years. Nevertheless, rivals sense opportunity in a weakened Intel, which has driven a wave of merger activity. In the past three months, AMD, Nvidia, and Marvell Technology Group (MRVL) have all announced massive deals with a total value of $85 billion. Each deal is an attempt to catch up with Intel. In agreeing to pay $35 billion for Xilinx (XLNX), AMD is getting a leader in so-called field-programmable gate arrays, or FPGAs, chips that can be reprogrammed after they are produced. Intel already has a larger FPGA business; it paid $17 billion for Altera in 2015. Nvidia is laying out some $40 billion to buy chip designer Arm Holdings from SoftBank Group (9984.Japan), another play for Intel-like scale. Shareholders are tripping over themselves to invest in bulked-up chip companies, even though Intel remains the clear heavyweight. At a recent $82, AMD stock trades at 49 times earnings estimate for the next 12 months, making it the priciest stock in the PHLX Semiconductor Index, which carries a forward price/earnings ratio of 22 times. Meanwhile, Intel, at $45, is historically cheap. Over the past 20 years, the stock has traded roughly in line with the S&P 500 index's P/E ratio based on earnings estimates for the next 12 months. Today, Intel trades at more than a 50% discount to that broad-market multiple. Wall Street analysts have turned against the stock, as well. Of the 38 analysts that cover Intel, a quarter rate it at Sell, the highest ratio in at least 20 years, according to FactSet. There are just 10 Buy ratings, also a 20-year low. The negative sentiment creates an opportunity for investors. Not much has to go right in Intel's business for the stock to see upside over the next few years. Even analysts' lukewarm sentiment suggests significant upside. The average 12-month price target for Intel shares is $53, 16% above Intel's recent close. With a dividend yield of almost 3%, Intel shares could return 20% in the coming year. "I think they are going to bounce back, says Patrick Moorhead, the founder and principal analyst at Moor Insights & Strategy, who has worked in or covered the technology sector for 25 years. "I don't think it's game over for Intel right now. They have two major issues. The first is manufacturing, and I don't think that's a lifetime problem. The second is they need to field very quickly a machine-learning training piece of silicon to compete with Nvidia for machine learning." Over the past year, Intel has bought two Israeli-based artificial-intelligence firms that together could help Intel compete with Nvidia on machine- learning chips. CEO Swan talked up the deals on Intel's latest earnings call, saying the machine-learning hardware is already being tested by several major cloud service providers. Even as Intel moves into new markets, skeptics see the company's size as a vulnerability. Its dominant share in CPUs means the company has ground to lose. Both AMD and Intel CPUs use x86 technology, which makes them relatively interchangeable for most personal computers. In recent years, though, the companies have taken a different approach to business. In 2009, AMD spun out its manufacturing capabilities into what's now GlobalFoundries, a private company. As a result, it has been able to ride Taiwan Semi's coattails, making it competitive with Intel's top chips. AMD sales are forecast to rise to $9.47 billion this year, from $6.73 billion a year ago, with net income doubling to $1.50 billion, from $756 million. AMD's global share of the CPU market was 22.4% in the third quarter, according to Mercury Research, up from 16% a year earlier. That includes emerging areas like the Internet of Things and other non-PC platforms. Some of those gains came from Intel. AMD also benefited from the rollout of new videogame consoles from Microsoft (MSFT) and Sony (SNE), which include custom graphics and processing chips from the chip maker. The AMD Rivalry AMD's business and its stock could be vulnerable, given historical patterns in the chip industry, according to Citi Research analyst Christopher Danely, who has been covering the semiconductor business for 25 years. He notes that AMD's market-share gains over time have generally been met with lower prices from Intel. He expects history to repeat itself, but his prediction has been delayed by the lower-than-expected chip yield that Intel has been getting from each silicon wafer it prints. That means Intel's economies of scale have been slower to develop in its latest generation of chips. "We think that as soon as they're able to bump up their production, they'll start to get more aggressive on price, and cut AMD down on the margin side," Danely says.