Chip giant Intel (INTC -0.35%), best known for its PC and data center processors that have long dominated both markets, is also one of the leading manufacturers of NAND memory chips, which are used in solid-state drives and smartphones for data storage.

While Intel's core business is extremely (and consistently) profitable, the memory chip business is a very different story. NAND chips are commodity products, meaning that chips from different manufacturers are largely the same. Most people have no idea what company manufactured the NAND chips in their smartphones. They don't know because it doesn't matter.

Prices for commodity products are dictated by supply and demand, and NAND chips are no different. Intel has no real pricing power in the NAND chip business. If there's an oversupply of chips, prices fall. If there's an undersupply, prices rise. This leads to sometimes brutal cycles where prices can fall off a cliff, making it next to impossible to turn a profit.

Intel has been struggling for years bringing new manufacturing processes to volume production for its PC and data center chips. Chronic delays have been one factor behind the resurgence of rival Advanced Micro Devices. The NAND chip business, which is capital intensive and provides no path to a competitive advantage, is a distraction for the company.

An Intel SSD.

Image source: Intel.

Getting out of NAND

Intel has finally come to the conclusion that the NAND chip business isn't a good fit. On Monday, the company announced that it had agreed to sell its NAND business to SK Hynix for $9 billion. The sale includes Intel's solid-state drive business, the NAND component and wafer business, and the Dalian NAND factory in China. It does not include Intel's Optane business, which uses 3D XPoint memory chips.

Intel is getting out because it can't differentiate itself in the NAND business, and because other types of products will provide better returns on investment. "For Intel, this transaction will allow us to further prioritize our investments in differentiated technology, where we can play a bigger role in the success of our customers and deliver attractive returns to our stockholders," said CEO Bob Swan.

Per-bit NAND prices generally decline over time. That's why a laptop with a 1TB solid-state drive is affordable today, when five years ago you would have likely found a hard drive instead. To maintain profitability manufacturing NAND chips, per-bit costs need to decline at least as quickly as per-bit prices.

During times when supply greatly outpaces demand, prices can plunge so quickly that profitability necessarily suffers. Memory chip manufacturer Micron, for example, experienced a 47% decline in per-bit NAND average selling prices in its fiscal 2019 compared to 2018. The previous year, Micron saw prices drop by just 13%.

It's a tough business, in other words, and it just doesn't make much sense for Intel to be involved in it.

What's next for Intel

Intel plans to use the proceeds of the NAND business sale to fund investments in long-term growth initiatives. The company's main task right now is to protect its share in the PC and server chip markets from AMD, which has been gaining share for the past few years.

Investors will likely hear more about the NAND exit when Intel reports its third-quarter results after the market closes on Thursday. Analysts are expecting the company to report a 5% drop in sales and a steep decline in per-share adjusted earnings, although it beat expectations last time around. Intel stock plunged when the company reported its second-quarter results despite those strong numbers because it announced a delay for its 7nm manufacturing process.

Getting out of NAND should help Intel refocus on the core parts of its business. With AMD proving to be a tough competitor, this move doesn't come a moment too soon.