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Intel Faces Uncertainty Amid Major Changes and Potential Takeover Talks

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Intel had a tumultuous week, stirring both excitement and concern on Wall Street about the company’s future. The chipmaker, which has lost over half its value in the last two years, saw its stock rise 11%, its best week since November. The surge followed major announcements, including the separation of its manufacturing division from its core business of designing and selling processors.

The week culminated with reports that Qualcomm had approached Intel about a potential takeover, which could become one of the largest deals in tech history. While it remains unclear if Intel has engaged in any formal discussions with Qualcomm, both companies have declined to comment.

Intel’s CEO Pat Gelsinger, who has faced numerous challenges since taking over in 2021, has expressed his intention to maintain Intel’s independence. He insists that the company’s manufacturing and design divisions are “better together” but revealed a new governance structure for the foundry business. This move is aimed at attracting outside capital and reassuring investors of Intel’s commitment to serious changes as it embarks on a complex revival plan.

Intel is tasked with addressing two significant hurdles: investing over $100 billion through 2029 to build chip factories in four U.S. states, while also making inroads into the booming AI market, currently dominated by competitors like Nvidia. Gelsinger has made a bold bet on Intel’s foundry business, hoping that increased domestic manufacturing will appeal to U.S. chipmakers concerned about reliance on Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung.

Despite these efforts, Intel’s core business of producing processors for PCs, laptops, and servers continues to struggle, losing market share to competitors like Advanced Micro Devices (AMD) and facing steep revenue declines. Intel’s client computing and data center divisions have both seen significant drops in revenue, while its AI initiatives have yet to make a substantial impact.

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The separation of the foundry business is seen as a way to attract more external customers, as many companies are hesitant to partner with Intel due to concerns about intellectual property. Despite landing Amazon as a customer for a networking chip, meaningful sales from external clients are not expected until 2027. Intel’s foundry efforts face stiff competition from TSMC, which currently manufactures chips for companies like Nvidia, Apple, and Qualcomm.

The U.S. government has emerged as Intel’s most significant supporter. The Biden administration awarded the company $8.5 billion under the CHIPS Act to bolster domestic chip production, with the possibility of an additional $11 billion in loans. This financial backing aims to reduce U.S. dependence on foreign semiconductor manufacturers. Intel has also secured $3 billion in funding to build chips for military and intelligence agencies in a classified program.

Even as Intel navigates these challenges, analysts remain skeptical about its long-term prospects. Gelsinger’s decision to maintain Intel as a unified entity could lead to a future spin-off of the foundry division, according to some market experts. JPMorgan Chase analysts have suggested that separating the two businesses could ultimately lead to a more favorable outcome for Intel in the coming years.

Despite this week’s developments, Intel still faces a steep road ahead. Its PC and server chip divisions continue to experience declining revenues, and the company is struggling to compete in the AI chip market, which Nvidia currently dominates. With Intel’s main businesses under pressure and its foundry ambitions years away from delivering results, investors are left wondering if the chipmaker can regain its former dominance or if more drastic measures are needed.

 

Qualcomm Explores Acquiring Intel’s Chip Design Business Amid Restructuring Efforts

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Qualcomm has been exploring the possibility of acquiring segments of Intel’s chip design business, sources familiar with the situation revealed. The mobile chipmaker, known for its smartphone chips and major clients such as Apple, is reportedly interested in Intel’s client PC design business. This move comes as Intel struggles with cash flow and looks to divest certain business units. Qualcomm’s interest appears to focus primarily on the PC chip design sector, rather than Intel’s server segment, as it aligns better with Qualcomm’s portfolio.

Intel recently experienced significant financial setbacks, including an 8% drop in PC client business revenue, layoffs, and a pause in dividend payments. Qualcomm’s plans to purchase parts of Intel have been under consideration for several months, though no official approaches or agreements have been made. While Qualcomm and Intel both declined to comment on the potential acquisition, sources indicated that these exploratory talks are ongoing and subject to change.

Intel, which is facing pressure to streamline its operations, is weighing options to reduce costs, including the possible sale of its programmable chip unit, Altera. The company remains committed to its PC business, particularly with new AI-focused chips like Lunar Lake. Despite its challenges, Intel continues to innovate, recently launching a PC chip with AI performance enhancements. Qualcomm, meanwhile, posted $35.82 billion in revenue last year, indicating its financial strength to pursue potential acquisitions.

Intel’s Turnaround Plan: Significant Job Cuts and Dividend Suspension

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Intel (INTC.O) announced on Thursday it would cut over 15% of its workforce, approximately 17,500 people, and suspend its dividend starting in the fourth quarter as part of a turnaround strategy aimed at addressing its struggling manufacturing business. The company also forecasted third-quarter revenue below market estimates, citing a decline in spending on traditional data center semiconductors and a shift toward AI chips, where it lags behind competitors.

Shares of the Santa Clara, California-based company plummeted 20% in extended trading, potentially wiping out more than $24 billion in market value. This drop follows a 7% decline earlier on Thursday, triggered by a conservative forecast from Arm Holdings. Despite Intel’s struggles, AI leaders Nvidia (NVDA.O) and AMD (AMD.O) saw after-hours gains, highlighting their advantageous positions in the booming AI market.

CEO Pat Gelsinger emphasized the need for a leaner headquarters and more field support for customers. Regarding the dividend suspension, Gelsinger stated, “Our objective is to … pay a competitive dividend over time, but right now, focusing on the balance sheet, deleveraging.”

Intel, employing 116,500 people as of June 29, aims to complete the majority of job cuts by the end of 2024. In April, it had declared a quarterly dividend of 12.5 cents per share.

In the midst of a turnaround plan, Intel is focusing on developing advanced AI processors and enhancing its for-hire manufacturing capabilities, seeking to regain its technological edge from Taiwan’s TSMC (2330.TW). This initiative has increased costs and pressured profit margins, prompting Intel to announce plans to reduce operating expenses and capital expenditures by over $10 billion in 2025.

Michael Schulman, chief investment officer of Running Point Capital, commented, “A $10 billion cost reduction plan shows that management is willing to take strong and drastic measures to right the ship and fix problems. But we are all asking, ‘is it enough’ and is it a bit of a late reaction considering that CEO Gelsinger has been at the helm for over three years?’”

As of June 29, Intel had $11.29 billion in cash and cash equivalents and total current liabilities of about $32 billion. The company’s lagging position in the AI chip market has resulted in a more than 40% drop in shares this year.

For the third quarter, Intel expects revenue between $12.5 billion and $13.5 billion, falling short of analysts’ average estimate of $14.35 billion, with an expected adjusted gross margin of 38%, below market expectations of 45.7%.

Analysts predict that Intel’s turnaround plan for the foundry business will take years to materialize, with TSMC expected to maintain its lead. Despite a 9% growth in the PC chip business in the April-June quarter, profitability remains a concern due to high production costs.

Bob O’Donnell, chief analyst at TECHnalysis Research, noted, “The irony is that … their first AI PC-focused processors are selling much better than expected. The problem is that the costs for those chips are much higher, meaning their profitability on them isn’t great.” He added that the decline in the data center business highlights Intel’s challenges in the AI infrastructure market dominated by non-Intel GPUs like those from Nvidia.

Intel’s data center business saw a 3% decline in the quarter. CFO David Zinsner indicated weaker consumer and enterprise spending in the current quarter, particularly in China, exacerbated by revoked export licenses impacting sales.

In response, Intel is slashing investments, expecting to cut capital expenses by 17% in 2025 year-on-year to $21.5 billion, based on the midpoint of its forecasted range, with costs remaining roughly flat in 2024.