Intel’s eventful week leaves Wall Street uncertain about chipmaker’s future

It’s been quite a busy week for Intel.

The chipmaker, which has lost more than half its value this year and suffered its worst trading day in 50 years last month after a disappointing earnings report, began the week Monday by announcing it was separating its manufacturing division from its core business of designing and selling computer processors.

And on Friday night, CNBC confirmed that Qualcomm Intel recently approached Qualcomm about a takeover, which would be one of the largest tech deals ever. It’s unclear whether Intel has engaged in talks with Qualcomm, and representatives for both companies declined to comment. The Wall Street Journal first reported the deal.

The stock rose 11% for the week, its best performance since November.

The rally offers little relief to CEO Pat Gelsinger, who has had a difficult time since taking over in 2021. The 56-year-old company lost its long-held title as the world’s largest chipmaker and was beaten in artificial intelligence chips by Nvidiawhich is now valued at nearly $3 trillion, more than 30 times Intel’s market capitalization of just over $90 billion. Intel announced in August that it was cutting 15,000 jobs, or more than 15 percent of its workforce.

But Gelsinger remains in control, and for now Intel is moving forward as an independent company with no plans to spin off the foundry. In a memo to employees Monday, he said the two sides were “better together,” though the company is creating a separate internal unit for the foundry, with its own board and governance structure and the ability to raise outside capital.

For the company that brought silicon to Silicon Valley, the road to rebirth isn’t getting any easier. By moving forward as a single company, Intel must overcome two massive hurdles at once: spending more than $100 billion by 2029 to build chip factories in four different states, while also getting a foothold in the artificial intelligence boom that’s defining the future of technology.

Intel plans to spend about $25 billion this year and $21.5 billion next year on its foundries, hoping that becoming a domestic manufacturer will convince U.S. chipmakers to move production offshore rather than rely on Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.

That outlook would be more palatable to Wall Street if Intel’s core business were at its peak. But while Intel still makes the majority of processors at the heart of PCs, laptops and servers, it is losing market share to Advanced Micro Devices and reports revenue declines that threaten its cash flow.

As challenges mount, the board met last weekend to discuss the company’s strategy.

Monday’s announcement of the foundry business’s new governance structure served as an opening salvo meant to convince investors that serious changes are afoot as the company prepares to launch its manufacturing process, called 18A, next year. Intel said it has seven products in development and has landed a giant customer, announcing that Amazon would use its foundry to produce a network chip.

“It was very important to say that we’re moving to the next phase of this foundry journey,” Gelsinger told CNBC’s Jon Fortt in an interview. “As we move to that next phase, it’s much more about building in efficiencies and making sure that we’re getting a good return for shareholders on these significant investments.”

Gelsinger’s foundry bet will take years to pay off, though. Intel said in the memo that it doesn’t expect significant sales from external customers until 2027. And the company will also suspend its manufacturing efforts in Poland and Germany “for approximately two years based on anticipated market demand,” while withdrawing plans for its Malaysian plant.

TSMC Intel is the world’s largest chipmaker, making chips for companies like Nvidia, Apple, and Qualcomm. Its technology allows fabless companies (those that outsource manufacturing) to make more powerful and efficient chips than is currently possible in volume at Intel’s factories. Even Intel uses TSMC for some of its high-end PC processors.

Intel has not announced any significant traditional U.S. semiconductor customers for its foundry, but Gelsinger said he would stay tuned.

“Some customers are reluctant to give their names because of the competitive dynamics,” Gelsinger told Fortt. “But we’ve seen a big increase in the volume of activity in our ongoing customer pipeline.”

Before Amazon’s announcement, Microsoft The U.S. company announced earlier this year that it would use Intel Foundry to make custom chips for its cloud services, a deal that could be worth $15 billion to Intel. Microsoft CEO Satya Nadella said in February that it would use Intel to make a chip, but did not provide details. Intel also signed a deal with MediaTek, which mainly makes low-end chips for mobile phones.

Intel’s main defender right now is the U.S. government, which is doing everything it can to secure supplies of American chips and limit the country’s dependence on Taiwan.

Intel announced this week that it has received $3 billion to make chips for the military and intelligence agencies in a specialized facility called a “secure enclave.” The program is classified, so Intel has not provided details. Gelsinger also met recently with Commerce Secretary Gina Raimondo, who has been vocal about Intel’s future role in chip manufacturing.

Earlier this year, Intel received up to $8.5 billion in funding under the Biden administration’s CHIPS Act and could receive an additional $11 billion in loans through the legislation, which was passed in 2022. None of the funds have been distributed yet.

“Ultimately, I think what policymakers want is for there to be a thriving American semiconductor industry in America,” said Anthony Rapa, a partner at the law firm Blank Rome who specializes in international trade.

Intel’s biggest foundry customer so far is itself. The company began reporting financial results for its division this year. For the most recent quarter, which ended in June, it posted an operating loss of $2.8 billion on revenue of $4.3 billion. Only $77 million of revenue came from external customers.

Intel aims to generate $15 billion in external foundry revenue by 2030.

Although this week’s announcement was seen by some analysts as the first step toward a sale or spinoff, Gelsinger said it was partly aimed at helping win new customers who might be concerned about their intellectual property leaking out of the foundry and into Intel’s other businesses.

“Intel believes this will allow customers and external foundry suppliers to more clearly differentiate themselves,” wrote analysts at JPMorgan Chase, who issued the equivalent of a sell recommendation on the stock, in a report. “We believe this could ultimately lead to a breakup of the company in the coming years.”

No matter what happens on that side of the house, Intel needs to find a solution for its core business, namely Core PC chips and Xeon server chips.

Intel’s PC chip division, which specializes in client computing, reported a revenue decline of about 25% from its 2020 peak compared with last year. The data center division fell 40% over that period. Server chip volume declined 37% in 2023, while the cost of producing a server product increased.

Intel has been adding AI bits to its processors as part of a push to boost sales of new PCs. But it still lacks a serious AI chip contender to take on Nvidia’s GPUs, which dominate the data center market. Futurum Group’s Daniel Newman estimates that Intel’s Gaudi 3 AI accelerator contributed only about $500 million to the company’s sales last year, compared with $47.5 billion in data center sales from Nvidia in its most recent fiscal year.

Newman asks the same question many Intel investors have about the company’s future.

“If you separate those two areas, you ask yourself, ‘What are they best at today? Do they have the best process? Do they have the best design?’” he said. “I think part of their strength is that they’ve done it all.”

— CNBC’s Rohan Goswami contributed to this report

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