Tom Yeung here with today’s Smart Money.
There’s an old Aesop’s fable known as “The Hound and The Hare.” The story reads…
One day, a shepherd sees a hound chasing a hare. After a long run, the hound gives up and lets the hare go. The shepherd mocks the hound, saying, “The little one is the best runner of the two!”
“You do not see the difference between us,” the hound replies. “I was only running for a dinner. He was running for his life.”
This fable now illustrates Intel Corp.’s (INTC) predicament.
The chipmaker, which we called finally too cheap to ignore in Fry’s Investment Report back in September, has been a hare racing for its survival. The company’s formerly world-class chip factories (fabs) have fallen behind its competition, and relative newcomer “hounds” like Qualcomm Inc. (QCOM) and Advanced Micro Devices Inc. (AMD) are attempting to eat Intel’s market for lunch.
To help America’s last high-end chipmaker, the Biden Administration passed the CHIPS and Science Act in 2022. The act promised $280 billion in new funding to develop and manufacture the domestic semiconductor industry. Intel was meant to be the single-biggest beneficiary, with $20 billion earmarked in a combination of grants and loans. This was the equivalent to a hare receiving a jet pack.
The calculus, however, was upended on November 6 after Donald Trump won the 2024 presidential election. His party previously called for a repeal of the CHIPS Act, and Republican control of both Congressional houses means the Biden-era package could quickly get nixed.
Intel’s $20 billion lifeline may disappear before a single dollar gets distributed.
So, what does this mean for the future of the chipmaker… and U.S. chip manufacturing?
What’s Next for Intel?
Intel’s situation highlights an uncomfortable truth now facing a new Trump administration. On the one hand, Trump remains vocally suspicious of virtually all of Biden’s industrial policies. He has vowed to pull back many of the Inflation Reduction Act’s unspent dollars, which he has called the “Green New Scam” and a “waste” of money. He has pledged to cut back on regulations limiting gas-powered vehicles. And it’s not hard to see why the CHIPS Act could be on the chopping block as well.
On the other hand, the incoming administration knows that Intel remains America’s best bet on domestic chip production. Trump has long maintained an “America First” mindset, where U.S. players are protected at foreign expense. His first term included steep tariffs on imports, from raw steel to washing machines. That means saving the U.S. chipmaking business must involve Intel simply because there are no other companies. Fabs like GlobalFoundries Inc. (GFS) focus on lower-end kit, while designers like Qualcomm outsource all manufacturing.
We believe the latter scenario will eventually win out. Intel remains far too strategically important, and as Eric says, “If not Intel, then who?”
The mechanics might look complicated. The Trump administration might rebrand existing legislation, like the CHIPS Act, as its own creation.
In the meantime, Intel has been focusing on self-help. On October 31, the chipmaker announced its first meaningfully positive results in a year. Its data center and AI segment saw a 9% jump in revenues.
More specifically, Intel reported that overall revenues had increased 4% sequentially to $13.2 billion, beating estimates by 2%. Adjusted net income of $726 million beat expectations of a $105 million loss. These results were driven by a $10 billion cost-reduction plan, strong demand for its 18A chips, and good progress on its manufacturing roadmap. Intel CEO Pat Gelsinger confirmed that Intel would manufacture its own next-generation Panther Lake processors starting late next year.
Management also raised full-year guidance. The company’s executives now expect sales to rise 4% sequentially, soothing fears that demand was in total freefall.
The news drove an 8% surge in share prices.
Meanwhile, Intel’s competitors are beginning to see how difficult it can be to compete against the legacy firm. Shares of Qualcomm have stagnated as it faces a patent battle with its chip designer, Arm Holdings plc (ARM). Last week, Arm gave the required 60-day notice to cancel its Qualcomm contracts, escalating their legal feud, and showcasing the benefits of Intel’s vertical integration. (Unlike Qualcomm, Intel holds the key patents to its own chip designs.)
As for AMD, Intel’s keenest rival saw a 16% pullback in share price last week after announcing lower-than-expected fourth-quarter guidance. The upstart is quickly finding how hard it can be to maintain high percentage gains from a larger base.
Intel Is Still a “Buy”
Of course, Intel remains a risky play. Its bold plans to leapfrog a generation of chips could backfire, leaving the firm even further behind competitors. It will drop out of the Dow Jones Industrial Average tomorrow, which tends to pressure shares in the short run as index-tracking funds sell their holdings.
Perhaps most importantly, the firm lacks the momentum that its rivals have. During the earnings call, Gelsinger admitted its Gaudi AI-accelerator chips are “not going to achieve” prior revenue targets.
But INTC shares are cheap, and the incoming Trump administration knows the firm is running for its life. As third-quarter results show, Intel is currently running fast enough to survive. And if it receives the help it needs, it might someday perhaps even thrive.
Regards,
Thomas Yeung
Markets Analyst, InvestorPlace
