Intel Inc (INTC)
US Government's National Champion?
We first wrote about INTEL on July 2nd, 2024. The subtitle of the article was “A mighty history but an uncertain future (?)
It can be found here and is a good read on the history of the company
We concluded that report with the following:
“Intel is a complex story with many moving parts.
They faced a huge setback in 2020 and are trying hard to recover from it.
Their substantial investments have paid off in the sense that they are once again manufacturing chips at the leading edge.
They have dual strategy of partially diluting their stake in the manufacturing processes while at the same time trying to make IFS profitable. This is going to be difficult and even the firm does not see this happening till 2030.
Intel’s recovery is a work in progress. We will continue to track it to see if there are signs of progress in the financial numbers. We are not allocating capital to it now.”
Our conclusions, if anything, were too optimistic.
On 27th August 2024, We noted the following in a report which can be found here.
On 1 August INTC announced Q2 Results and the stock fell 20% and has declined further since then. Intel is down 58% this year.
The key question has the market overshot on the downside and is the stock at an attractive price now?
Our conclusion at the end of August 2024 was as follows:
Intel feels like a large rich historic castle which is being attached on many sides. IDM 2.0 and the recent cost cutting drives indicate Intel is responding to the myriad threats.
However, the competition (esp. TSMC) is intense, and the proposed strategy is too risky.
We will not invest in INTC at this stage but will continue to watch it.
This was the key chart showing the number of companies which could make the most advanced chips. As we had got to 3nm to 5nm (nanometre), INTC seemed to have fallen out of the race and only Samsung and TSMC were left as the manufacturing foundry powerhouses. TSMC is the dominant player but its manufacturing plants and expertise are mostly in Taiwan, which has been claimed by China and is under possible treat by it.
In our portfolio, we invested in TSMC and Nvidia (our largest holding) and did not commit to capital into INTC.
In the last year TSMC has given a return of 39% in Taiwan dollar terms… Over the same period Nvidia has given at 55% return.
As of yesterday, INTC had given a 1-year return of 55%. And this was before today’s 28% move after the announcement that Nvidia was going to take a $5bn stake which would be a stake at price of $23.
Did we miss a trick by not investing on INTC? The numbers clearly indicate that this would be the case. In 2025, on a year-to date basis, the stock was flat until 11th August.
In the last month to yesterday, the stock had advanced 36%.
Pat Gelsinger quit as the CEO in March and had been replaced by Lip-Bu Tan.
The rally in INTC was triggered by an announcement on August 22nd of 10% equity ownership worth $8.9bn by the US government at a price of $20.47.
The bulk of the money would come from undisbursed CHIPS Act grants and Secured Enclave national security program. This was money originally allocated to Intel but not paid out
The money had been designed as a grant, but the Trump administration determined the US government should get equity in INTC in return. The government has decided INTC will be an American national champion for onshore chip production.
This raises a key question. Should the government be in the fund management business trying to pick winners?
The “trade” has been profitable as shares are now trading at about $30.9 per share. Shares of AMD, ARM and TSM are lower.
The Biden administration had introduced the Chips ACT for strategic reasons. They wanted to establish advanced chip making capacity in the United States. Intel, TSMC and Samsung are among many companies which announced foundry investments in the USA in good faith.
However, now that the US government has a stake in INTC, will they favour them in government or defence contracts or “encourage” fab-less chip designers such as Nvidia and Qualcomm to give more business to INTC rather than the likes of TSMC or Samsung. The latter have invested billions on capacity in the US.
The US government ‘s investment was swiftly followed by a $2bn investment by Softbank of Japan at US 23 per share, much higher than price paid by the US government
Softbank owns 85% of ARM Computer and also has a small stake in Nvidia, OpenAI and Project Stargate.
Softbank has been rapidly followed by the announcement of a $ 5bn investment in INTC by Nvidia. This is at a price of $23.26, somewhat higher than that paid by the US government and Softbank.
Much of Nvidia great success in the last few years has been due to the marriage and execution prowess with the engineering and manufacturing expertise of TSMC. This investment in INTC suggest some change in this strategy.
The strategic reasons behind this investment include:
Strengthening collaboration between the two companies to jointly develop multiple generations of custom chips for personal computers and datacentres. Intel will build Nvidia-custom x86 CPUs that will integrate with Nvidia AI GPUs, enhancing AI computing capabilities.
Using proprietary Nvidia technology to enable faster communication between Intel CPUs and Nvidia GPUs, boosting performance in AI infrastructure and personal computers.
Providing Intel with financial support and access to Nvidia’s market-leading AI chip technology amid Intel’s recent turnaround efforts.
Nvidia has voted in support of the US government’s plan to promote INTC as a US champion. They have taken a stake in INTC and will collaborate with them and give them more chip manufacturing orders in the future.
Does this make INTC a good investment. It clearly has the momentum behind it and has the prospect of greater orders from Nvidia in the future.
However, it is difficult to value companies where the government will play a major role. We will consider INTC’s valuation in a later note.