Huge news came through for Intel (INTC 0.35%) recently as it announced an extended partnership with Amazon's (AMZN +0.76%) cloud computing division called Amazon Web Services (AWS). The partnership revolves around commitments for co-designs on new computer chips on Intel's architecture as well as commitments to spending on Intel's new manufacturing plants.
Intel's stock shot up around 10% on the news but has since faltered again. The stock remains down about 70% from its 10-year high due to competitive pressures from other computer chip manufacturers and as Intel fell behind in advanced semiconductor manufacturing in recent years. However, I wouldn't underrate this news from Amazon, which is one of, if not the largest, spender on computer chips globally. It is committing to Intel despite rising doubts about the once-dominant computer chip manufacturer.
Does that mean you should commit to Intel's stock?
An Amazon helping hand
AWS is the largest cloud computing provider. The lifeblood of a cloud computing business is self-explanatory: It is built on computer chips. This is why Amazon is such a large purchaser of semiconductors, spending an estimated tens of billions of dollars on computing products and adjacent services to power its monster data centers.
Intel has historically been a huge supplier to AWS and other data center customers but has fallen behind in the age of artificial intelligence (AI) to the likes of Nvidia and Advanced Micro Devices. Given Nvidia's superiority in this new field, the company has been able to implement extreme price hikes on its customers like AWS. This has helped push Nvidia's stock up 2,500% in the last five years.
All this is to say that the Amazon and Intel partnership makes sense. Intel needs financial commitments to close the gap with Nvidia, and Amazon would like more competition so Nvidia cannot implement huge price increases when selling to AWS.
In the long run, this can save Amazon money by making it less dependent on Nvidia, while also providing a pipeline for billions in spending for Intel's upcoming computer chip products. The partnership is interesting, as both Intel and Amazon will be investing in co-designing advanced computer chips. That means the companies will be working hand-in-hand to catch the competition.
NASDAQ: INTC
Key Data Points
Building U.S. subsidized factories
One part of the Intel-Amazon partnership is chip design. The other part -- and perhaps more important -- is the fact the chips will be custom-designed for Intel's new manufacturing plants in Ohio. Intel is spending tens of billions of dollars on these plants in order to build its new foundry business, which means manufacturing computer chips for third parties like Amazon. Intel historically was vertically integrated and only manufactured its own chip designs, but this led it to fall behind technologically in the last 10 years.
So far, Intel's foundry business is not doing well. It generated just $4.3 billion in revenue last quarter and had a $2.8 billion operating loss. In order to make the business profitable, Intel will need huge commitments from customers to cover the large fixed costs of the manufacturing facilities. Securing Amazon as a customer is a big first step.
Lastly, investors should watch for Intel grants from the United States government. With the CHIPS Act, the U.S. is subsidizing computer chip manufacturing to help offset geopolitical risks with China. Intel was already awarded $3 billion for defense-focused chip designs, which is a good start, but it will be a big help if more comes its way.
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Rough seas, but light at the end of the tunnel
Intel's financials look rough right now. The company is burning more than $12 billion in free cash flow each year as it loses customers to Nvidia and invests in new foundry manufacturing facilities. In a vacuum, the stock looks uninvestable even though it is down 70% from all-time highs.
This may be the worst Intel ever looks, though. The U.S. government wants it to succeed and probably won't let the company fail, with more subsidies likely coming its way. Amazon spends a boatload on computer chips every year and just reaffirmed its position with Intel. Intel has close to $30 billion in cash and equivalents on its balance sheet, which will help with the temporary cash burn. Headwinds from the foundry build-out will subside once these expensive manufacturing plants start operating.
Add it all together, and I think it makes sense to go dumpster diving for Intel shares right now. This is a once-beloved brand that many want -- some might say need -- to succeed. Consider buying Intel stock and holding for the long term.
