Intel's (INTC 6.56%) stock price collapse at the start of August on news out of its earnings report wasn't a big surprise. The chipmaker had fallen behind after years of operating a money-losing foundry business, while fabless rivals, like Advanced Micro Devices, have gained market share.
Intel has long dominated the PC processor business, but a cultural aversion to risk-taking prevented the company from extending that leading position into other areas. It missed the mobile transition and now seems to be falling behind in artificial intelligence (AI).
The company even lost Apple as a customer for its Macs after Apple experienced several years of frustration with Intel's chip quality and the pace of its development. Apple also saw an opportunity to improve its battery life and switched to using Taiwan Semiconductor Manufacturing (TSMC) as its manufacturing partner because TSMC could make smaller chips.
Intel also passed up potentially game-changing opportunities, including a chance to invest in OpenAI back in 2017. Intel was in talks to take a 15% stake in the company for $1 billion. But then-CEO Bob Swan said he was skeptical that generative AI models would make it to market soon enough to repay Intel's investment and didn't close the deal. It was just the kind of short-sightedness and poor judgment that has plagued the company these past few years.
Similarly, SoftBank, the Japanese mega-investor that's funded everything from Uber Technologies to Arm Holdings, held talks with Intel about making an AI chip that would compete with Nvidia. Those talks broke down after Intel couldn't meet Softbank's requirements. That, again, is evidence of a familiar pattern of Intel's products not meeting standards.
The Intel bulls have been a bit desperate for some good news to counter all the negativity for some time now. They recently got some in the form of two new announcements about Intel's foundry division. The news sparked a 9.2% jump in the stock price over two days (Sept. 16-17).
Is this the start of a rebound, or is it just a blip? Let's take a closer look.
Image source: Getty Images.
Amazon gives Intel a shot in the arm
After-hours on Monday, Intel announced an expanded partnership with Amazon (AMZN 1.97%), saying the two companies would co-invest in a multiyear, multibillion-dollar program for Intel's foundry to produce custom chips, including an AI fabric chip, on its upcoming 18A (18 angstrom) process. Additionally, Intel will make a Xeon 6 chip for compute-intensive AI workloads.
Investors should understand that this isn't a new relationship. Amazon and Intel have worked together since 2006, so this is an expansion of an existing relationship. However, the announcement is significant because it shows a vote of confidence in Intel's foundry business from a major customer right when Intel desperately needs one.
It's unclear how much the expansion would be worth to Intel. The work will take place in Ohio, where Intel plans to build a new semiconductor manufacturing plant, and Amazon said it will invest $7.8 billion to expand its data center operations.
Intel wins $3 billion in CHIPS money
The Amazon news followed an announcement earlier that day that Intel had been awarded $3 billion in direct funding from the CHIPS Act for the Secure Enclave program, which is run by the U.S. Defense Department. Intel said the move reflects "continued progress" at its foundry, even as it's losing billions of dollars a year in manufacturing chips. The manufacturing arm, however, is vital to government interests, as the federal government prefers to work with an American company that will manufacture its chips on U.S. soil.
This funding is separate from the earlier announcement that Intel would receive $8.5 billion from the CHIPS Act for manufacturing.
NASDAQ: INTC
Key Data Points
Can Intel turn it around?
As Intel restructures its business and plays catch-up in the AI era, the most important question for the company is whether it has learned from its mistakes. Can it embrace risk-taking and a culture that values bold thinking instead of just toeing the company line?
Last month, the resignation of director Lip-Bu Tan, one of the only directors with any technical expertise in semiconductors, rattled investors as news outlets reported that Tan had grown frustrated with Intel's bloated workforce, use of contract manufacturing, and risk-averse and bureaucratic culture. That move offers the latest evidence that the culture still needs an overhaul, and that will take time.
For investors, the two announcements this week are positive steps, but it will take more than that to put the company back on track. The good news is that the stock has finally risen enough that there's even talk of a turnaround, but the business will likely take years to recover if it can reinvent itself. Recency bias is probably giving the stock an exaggerated boost as the company still faces a lot of challenges.
Still, turning the foundry business around is key. If Intel touts more achievements like the ones above, investors should see the stock continue to move higher.
