Intel Stock Jumps on Reports Qualcomm Approached It for Takeover

Intel stock jumped over 3% in yesterday’s price action and defied the weakness in chip stocks amid reports that Qualcomm recently approached the company for a possible takeover. Intel shares have slumped this year and the sell-off particularly deepened after the company’s Q2 earnings release.

While both Intel and Qualcomm are in the chip industry and compete in many markets, especially the PC industry, their business models differ. Qualcomm, like Nvidia, is a chip-designing company and relies on foundries like Taiwan Semiconductor Manufacturing Company to produce its chips.

Intel Received More Funds Under the CHIPS Act

Intel on the other hand has both a chip designing and foundry business. The company’s foundry business has been posting massive losses and the segment’s operating losses widened to $7 billion last year – compared to $5.2 billion in 2022.

Intel has been looking to build its foundry business and make chips for other companies too. The company is among the biggest beneficiaries of the Biden administration’s CHIPS and Science Act and recently received another $3 billion in funding as the US seeks to onshore chip production.

“As the only American company that both designs and manufactures leading-edge logic chips, we will help secure the domestic chip supply chain,” said Intel on the funding.

Intel-Qualcomm Merger Might Face Regulatory Heat

Notably, while Intel generates more revenues than Qualcomm, its market cap is less than half of the latter. Intel stock has been a long-term underperformer and never returned to its dot-com era highs. After its Q2 loss, it also suspended its dividend to conserve cash.

Meanwhile, while Intel stock rose on reports of Qualcomm being interested in the company, the deal if at all it was to be pursued, is bound to face regulatory scrutiny – especially in China.

Previously Chinese regulators blocked Intel’s bid to acquire Tower Semiconductor and Qualcomm’s proposed acquisition of NXP Semiconductor. Other regulators too have been wary of big mergers in the chip space, and in 2018, then-President Donald Trump blocked Broadcom from acquiring Qualcomm over national security concerns.

More recently, Nvidia and Arm called off their merger amid regulatory heat in Asia, Europe, and the US. Arm, which is backed by Japan’s SoftBank eventually went for an IPO.

Intel Has Turned the Foundry Business into a Subsidiary

Intel has turned its foundry business into a subsidiary which could also pursue funding from third parties. Notably, the foundry business has been burning a lot of cash as Intel expands chip-making facilities in the US and Europe. The process was logical as Intel started reporting the loss-making segment’s income statements separately beginning earlier this year.

In its release, Intel said “A subsidiary structure will unlock important benefits. It provides our external foundry customers and suppliers with clearer separation and independence from the rest of Intel.”

The company added, “Importantly, it also gives us future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation.”

INTC AWS Partnership

Intel has also announced a strategic partnership with Amazon Web Services (AWS) to produce artificial intelligence (AI) chips. As part of the multi-year, multi-billion-dollar deal, Intel will produce an AI fabric chip for the cloud giant on Intel 18A which is its most advanced process node. The company will also produce a custom Xeon 6 chip on Intel 3.

“Intel’s chip design and manufacturing capabilities, combined with the comprehensive and broadly adopted cloud, AI and machine learning services of AWS, will unleash innovation across our shared ecosystem and support the growth of both businesses, as well as a sustainable domestic AI supply chain,” said Intel’s CEO Pat Gelsinger on the deal.

INTC Stock Has Sagged

Despite having rebounded from its lows, Intel is still down around 54% for the year and is the second worst-performing S&P 500 stock after Walgreens Boots Alliance. Notably, a section of the market had started writing off Intel which has been gradually losing out to rivals like Nvidia and Advanced Micro Devices.

In his message, Gelsinger said, “All eyes will remain on us. We need to fight for every inch and execute better than ever before. Because that’s the only way to quiet our critics and deliver the results we know we’re capable of achieving.”

He added, “We must maintain our focus on innovation while also becoming an engine of operational efficiency and financial performance that’s built to win in the market.”

Analysts Are Still Not Impressed By INTC

Intel faced a flurry of downgrades and target price cuts following its Q2 release and some analysts don’t believe that the chip giant is out of the woods despite many positive announcements.

“AWS win sounds impressive but INTC has already been supplying AWS with CPU for a long time so customization isn’t exactly something new, while the AI fabric (networking) win on 18A will probably matter only from CY26 while competing against tough Ethernet switch incumbency from AVGO and others,” said Bank of America analyst Vivek Arya in his note.

While Citi analyst Christopher Danely sees the $3 billion funding as a “mild positive” he believes that the decision to make Foundry an independent subsidiary wasn’t a good decision.

“We expect Intel’s EPS to be under pressure given its foundry business, which we believe has minimal chance of succeeding,” added Danley in his note.