Intel's Strategic Shift: Foundry Business Spin-Off and Amazon Partnership Boost Investor Confidence

Did Amazon Just Save Intel Stock? | The Motley Fool

This is especially true when that friend runs the largest cloud computing business in the world and you are a manufacturer of computer chips. That is why Intel (INTC 3.31%) stock soared after the company announced a new partnership with Amazon (AMZN 0.91%) for custom chip designs for its Amazon Web Services (AWS) subsidiary. Intel stock shot up from around $19 to $21 on this news, stemming painful losses that shareholders have incurred for the last few years. Intel shares are down 70% from its five-year high as the company struggles to build its new foundry business and compete in the age of artificial intelligence (AI). Today, Amazon is stepping up to the plate and saying it will invest in Intel's computer chip business for the long haul. Does this make Intel stock a buy after falling 70% from recent highs? On Sept. 16, Amazon and Intel announced a co-investment in custom chip design intended to cost billions of dollars. In other words, both companies have agreed to pool resources to design computer chips together. Amazon will also be spending $7.8 billion in central Ohio on data center development. This is close to where Intel is building a $20 billion semiconductor manufacturing plant. The relationship between Amazon and Intel is tightening. This makes sense for two key reasons. First, Intel is one of the largest suppliers of computer chips for AWS data centers. Amazon spends billions of dollars with Intel each year, so if they can improve chip designs, both companies will make money. Second, Intel has lost market share during the AI boom of the last few years to Nvidia and Advanced Micro Devices. Nvidia specifically is pulling far ahead in AI and has increased its pricing to customers such as Amazon. Amazon likely sees this chip design partnership with Intel as a way to increase competition with Nvidia, which will hopefully lower its computer chip costs. Intel can win by stealing market share back from Nvidia. Intel's business has suffered in recent years due to its vertically integrated chip manufacturing business. Nvidia and AMD do not make computer chips, they simply design them using software. They are made by Taiwan Semiconductor Manufacturing (TSMC), which operates what is known as a foundry business model. This company serves as a manufacturer of semiconductors for multiple parties, but never competes directly with its chip-designing customers. TSMC has aggregated a huge portion of the semiconductor manufacturing market and has taken the crown from Intel as the most advanced developer in the entire sector. A few years ago, Intel began planning to build its own foundry business to compete with TSMC. So far, the business has not done well. Last quarter, revenue was $4.3 billion, not growing, and the segment had a $2.8 billion operating loss. Intel is playing the long game with the foundry business. It has plans to invest tens of billions of dollars in the United States for manufacturing in places such as its Ohio facility. With the CHIPS Act from the U.S. government, it should be eligible for subsidies on this spending. This bet needs to work out, because these capital investments in new manufacturing facilities are burning a hole in Intel's pocket. Free cash flow was negative $12.6 billion in the last 12 months and has turned sharply negative after being positive for decades. In order to revert to positive free cash flow, Intel will need to procure spending on chips from its partners, such as Amazon (a current customer of TSMC) for its foundry business. At current prices, it is hard to value Intel stock. The company is going through a heavy investment cycle and is currently unprofitable. It trades at a market cap of $88.6 billion, which looks cheap compared to its historical cash-flow generation of over $10 billion per year before its competitive struggles. I think this Amazon partnership is a positive development, but it doesn't save Intel's business and/or stock. The company has been a laggard in the semiconductor market for several years now. It is making a risky bet to transition its business over to the foundry model in the middle of that market-share slump. It is not clear whether this will be successful. In the meantime, it is burning over $10 billion a year in free cash flow. However, if Intel is successful and becomes the American version of TSMC, there is a lot of upside for the stock. TSMC is closing in on a $900 billion market cap, which is 10 times the size of Intel today. It is not implausible for Intel to reach this valuation if the business model transition is successful. Investors looking to bet on Intel should make it a small position in their portfolios, given the high upside and large downside potential of the stock.

Intel Is Turning Its Foundry Business Into a Subsidiary. Time to Buy? | The Motley Fool

Investors should take a closer look at the chipmaker after its latest strategic pivot. The brutal sell-off in Intel (INTC -2.91%) stock may finally be over. The stock seems to have resurged on news that the company plans to turn its foundry business into a subsidiary. It also expanded its deal with Amazon, inking a new agreement to produce artificial intelligence (AI) chips for Amazon Web Services (AWS). That could transform it into a major player in the AI server chip market. Nonetheless, considering the stock's performance in recent months, one could question whether this recent bounce is a sign that a sustainable recovery for Intel is coming, or if investors should continue to avoid the stock. Without a doubt, Intel has fallen into decline, and its attempted return to prominence under CEO Pat Gelsinger has not gone as planned. The company made ambitious plans to spend tens of billions on new foundries to create a third-party chip manufacturing business that could compete with Taiwan Semiconductor Manufacturing (TSMC) and Samsung. It also made technical improvements and boldly claimed that it would return to process leadership by 2025. However, its planned $25 billion to $27 billion in capital expenditures over the next year will take a considerable toll on its balance sheet. Also, multiple sources told Reuters that chips Intel produced for Broadcom failed that company's tests, calling into question how well Intel can compete in that business. The fact that Intel suspended its dividend and is laying off over 15% of its workforce shows that it has fallen well short of its goals. That news in August sent the stock to multiyear lows. Yet its foundry business has shown potential for improvement. Intel will turn that business into a separate subsidiary, giving it its own operating board and the ability to raise capital separately. Additionally, the aforementioned deal with AWS could help make Intel's foundry business a top company in its industry. Intel's stock was down by about 60% year to date prior to this latest bounce. In that context, the investment thesis for Intel has arguably become compelling for one key reason: valuation. However, its P/E ratio of 93 does not reflect this. By contrast, its price-to-sales (P/S) ratio is just under 2, far below the 11 P/S ratio of rival AMD. The undervaluation is especially apparent in its price-to-book-value ratio of less than 0.8. This means the market has valued Intel at more than 20% below the value of its assets minus its liabilities. That level is likely far too low for a company that remains a major chip developer and producer. At the same time, investors have many choices when it comes to semiconductor stocks. As Intel has lost value, stocks like AMD, Qualcomm, and Nvidia have delivered market-beating returns as they find customer bases in the AI chip market. Investors have to ask themselves whether the bargain in Intel stock is worth pursuing when considering the clearer opportunities offered by Intel's competitors. Investors who choose to buy Intel stock should likely limit their exposure to small, speculative positions. The company's valuation does make the stock look like a compelling bargain, assuming it can raise more outside funding and successfully produce Amazon's AI chips. However, the chip industry is in a period of significant secular growth thanks to the AI trend, and many of Intel's peers have experienced considerable share price increases as its stock has fallen. Also, the setbacks in its Broadcom deal raise questions as to whether it will be able to execute on its plans to deliver new high-end chips. That highlights the risks that come with speculating on Intel's recovery. Ultimately, Intel stock could be at the beginning of a long-awaited resurgence, but until the company can successfully address more of the uncertainties surrounding its business, investors should buy shares cautiously if they buy them at all.

Down More Than 50%, Can Intel Stock Rebound on New Foundry Plans? | The Motley Fool

With its shares trading down more than 57% so far in 2024 while the S&P 500 is up roughly 18%, it's pretty clear that Intel (INTC 1.78%) is having a difficult year. Much of Intel's struggle is tied to its floundering foundry business. This business manufactures semiconductor chips for itself as well as for other chipmakers, and it is a rival to Taiwan Semiconductor Manufacturing. Intel started the unit in 2021 to help revive its overall business, but since then it has largely just piled up losses, including a $2.8 billion operating loss last quarter and $5.3 billion loss through the first half of the year. In a public letter released recently, the company detailed plans it hopes will help turn around its business. The biggest news was that the semiconductor company will turn its foundry business into an independent subsidiary. While the leadership team will remain the same and continue to report to Intel's CEO, it will also create its own board that will include independent directors. The company said the separation of the business into a subsidiary will give customers more transparency into the foundry business. The business could also pursue outside funding and have a separate capital structure from Intel. Intel said one of the keys with its foundry business will be to improve its capital efficiency. It said now that it has transitioned to extreme ultraviolet lithography (EUV) manufacturing technology, it is time to move from a period of rapid investment to a more normalized one. As part of this, it will delay projects in Germany and Poland, while continuing to build out plants in the U.S. In conjunction with the letter, the company also announced that it was awarded $3 billion in direct funding from the U.S. government as part of the Secure Enclave program under the CHIPS and Science Act. The award will help it fund projects in Arizona, New Mexico, Ohio, and Oregon. The company also announced an expanded deal with Amazon, in which the two companies will co-invest in custom chip designs. Intel's foundry will also produce artificial intelligence (AI) fabric chips for Amazon Web Services using Intel's newest 18A technology, as well as Xeon 6 chips using its Intel 3 technology. This is good news for a company needing some, especially after it was widely reported earlier this month that Broadcom rejected Intel's new 18A technology as not being ready for high-volume production after tests. Of course, this doesn't solve all of Intel's foundry issues. Questions will remain until the foundry begins manufacturing chips at high volumes using the technology, which it plans to do next year. The separation of the foundry into a new subsidiary could set the stage for Intel to fully spin off the business. While this wouldn't fix the situation for Intel, it would remove a problem (as well as the losses and capital expenditures (capex) it was pouring into the struggling business). However, the foundry isn't the only issue the company is dealing with right now. In its products segment, two of its three product categories saw revenue declines last quarter, with data center and AI revenue down 3% to $3 billion and network and edge revenue edging down 1% to $1.3 billion. Meanwhile, subsidiary Altera's revenue plunged 57% year over year and spinoff MobileEye's revenue fell 3% (Intel still owns a controlling stake in MobilEye). Neither acquisition has particularly worked out for the company. The only part of Intel's business that performed well last quarter was its client computing group, which saw revenue rise 9% year over year to $7.4 billion. However, this business is clearly in the crosshairs of Arm Holdings, which has said it is looking to capture a 50% market share in the Windows-based PC market in the next five years. This would be a big blow to Intel. Intel currently trades at a forward price-to-earnings (P/E) of 18 times next year's analyst estimates, which seems a bit high given its struggles. However, its core product business might be able to do about $2.10 in earnings per share (this assumes about $12 billion in product segment operating income, a 25% tax rate, and 4.3 billion shares) versus the $1.20 analyst estimate for the whole company that includes losses from the foundry business. That would put its core business closer to a 10 times forward P/E. That's not expensive, and then there is still value in the Altera, MobileEye, and foundry businesses. I think there is some potential for the stock to see a boost as it looks to potentially spin off its foundry and later the Altera business, planned for 2026. However, the company still has a lot of work to do to improve its overall situation.