Wild week at Intel leaves Wall Street uncertain about the chipmaker’s future

It was quite a week for Intel.

The chipmaker, which has lost more than half its value this year and had its worst trading day in 50 years last month after a disappointing quarterly report, began the week on Monday by announcing that it would split off its manufacturing division from its core business of developing and selling computer processors.

And late Friday, CNBC confirmed that Qualcomm recently approached Intel about an acquisition. It would be one of the biggest tech deals ever. It's not clear whether Intel has held talks with Qualcomm, and representatives from both companies declined to comment. The Wall Street Journal was the first to report on the matter.

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

The rally is hardly a relief for CEO Pat Gelsinger, who has had a rough run since taking office in 2021. The 56-year-old company lost its long-standing title as the world's largest chipmaker and was ranked second 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 would cut 15,000 jobs, or more than 15% of its workforce.

But Gelsinger is still in charge, saying Intel is moving forward as an independent company for now and has no plans to spin off the foundry. In a memo to employees on Monday, he said the two halves are “better together,” even though the company is setting up a separate internal unit for the foundry, with its own board and management structure and the ability to raise outside capital.

For the company that brought chips to Silicon Valley, the road to recovery isn't getting any easier. Intel must move forward as a closed company, clearing two huge hurdles at once: spending more than $100 billion by 2029 to build chip factories in four different states, while gaining a foothold in the AI ​​boom that is shaping the future of technology.

Intel expects to spend about $25 billion on its manufacturing facilities this year and $21.5 billion next year. The company hopes that becoming a domestic manufacturer will convince U.S. chipmakers to source their production domestically rather than relying on Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.

This prospect would be more palatable to Wall Street if Intel's core business was at its peak. But while Intel still makes the majority of processors for PCs, laptops and servers, the company is losing market share to Advanced micro devices and reports a decline in sales that is jeopardizing its cash flow.

In view of the increasing challenges, the Board of Directors met last weekend to discuss the company's strategy.

The announcement of the new governance structure for the foundry business on Monday was a first step in convincing 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 landed a huge customer, and announced that Amazon would use its foundry to produce a network chip.

“It was very important to say we're entering the next phase of this foundry journey,” Gelsinger said in an interview with CNBC's Jon Fortt. “As we enter this next phase, it's much more about creating efficiencies and making sure we get a good return for shareholders on these significant investments.”

Still, Gelsinger's investment in the foundry will take years to pay off. Intel said in the memo that it doesn't expect significant sales to outside customers until 2027. And the company will also pause its manufacturing efforts in Poland and Germany “for approximately two years due to expected market demand” and withdraw its plans for its Malaysian factory.

TSMC is the giant in the chip factory world, producing for companies like Nvidia, Apple and Qualcomm. Its technology enables fabless companies – those that outsource production – to produce more powerful and efficient chips than are currently possible in large quantities at Intel's factories. Even Intel uses TSMC for some of its high-end PC processors.

Intel has not yet announced a major traditional American semiconductor customer for its foundry, but Gelsinger said to stay tuned.

“Some customers are reluctant to reveal their names because of competitive dynamics,” Gelsinger told Fortt. “But we have seen a significant increase in customer activity.”

Before Amazon’s announcement Microsoft Earlier this year, Microsoft announced it would hire Intel Foundry to produce custom chips for its cloud services, a deal that could net Intel $15 billion. Microsoft CEO Satya Nadella said in February that the company would hire Intel to produce a chip, but did not provide details. Intel has also signed a deal with MediaTek, which primarily makes low-end chips for mobile phones.

Intel's biggest advocate at the moment is the US government, which is making great efforts to secure chip supplies from the US and reduce the country's dependence on Taiwan.

Intel announced this week that it had received $3 billion to build chips for the military and intelligence agencies at a special facility called the “Secure Enclave.” The program is classified, so Intel did not disclose details. Gelsinger also recently met with Commerce Secretary Gina Raimondo, who has been a vocal advocate for Intel's future role in chip production.

Earlier this year, Intel received up to $8.5 billion in funding from the Biden administration under the CHIPS Act and could receive an additional $11 billion in loans through legislation passed in 2022. However, the funds have not yet been disbursed.

“Ultimately, I think policymakers want a thriving semiconductor industry in America,” says Anthony Rapa, a partner at Blank Rome, a law firm specializing in international trade.

Currently, Intel itself is its largest customer. The company began disclosing its division's finances this year. In the last quarter, which ended in June, it reported an operating loss of $2.8 billion on revenue of $4.3 billion. Only $77 million of the revenue came from external customers.

Intel has set a goal of generating $15 billion in external revenue from the foundry industry by 2030.

While this week's announcement was seen by some analysts as the first step toward a sale or spin-off, Gelsinger said it was intended in part to attract new customers who may be concerned about their intellectual property migrating out of the foundry and into Intel's other businesses.

“Intel believes this will provide clearer separation to third-party foundry customers/suppliers,” JPMorgan Chase analysts, who rate the stock with a sell rating, wrote in a report. “We believe this could ultimately lead to a spin-off of the business over the next few years.”

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

Intel's client computing group – the PC chip division – reported a revenue decline of about 25% from its peak in 2020 to last year. The data center division saw a 40% decline during that period. Server chip volumes fell 37% in 2023, while the cost of making a server product rose.

Intel has added AI chips to its processors to boost sales of new PCs, but the company still lacks a strong AI chip competitor to Nvidia's GPUs, which dominate the data center market. Daniel Newman of the Futurum Group estimates that Intel's AI accelerator Gaudi 3 contributed only about $500 million to the company's revenue last year, compared to Nvidia's $47.5 billion in data center revenue last fiscal year.

Like many Intel investors, Newman asks the same question: What's next for the company?

“When you break those two things down, you ask yourself, 'What else do they do best? Do they have the best process? Do they have the best design?'” he said. “I think part of their strength was that they could do everything.”

— CNBC's Rohan Goswami contributed to this report

REGARD: CNBC's full interview with Intel CEO Pat Gelsinger