Intel (INTC, Financial) has finally received some positive news amid a challenging 2024, where its stock has dropped by about 60%. Last Friday, it was reported that Intel is set to secure up to $3.5 billion in federal grants through The Pentagon's "Secure Enclave" initiative. This program aims to reduce the military's dependence on foreign chip manufacturers. While this isn't a complete turnaround for Intel, the new military contract is a welcome development that should boost its top-line and cash flow.
- The government's options for selecting a domestic chip maker for the Secure Enclave program are limited. Up to 90% of the world's advanced semiconductors are manufactured in Taiwan, primarily by Taiwan Semiconductor Manufacturing (TSM, Financial). Intel is one of the few U.S. chip manufacturers with the scale to meet the government's needs.
- Intel has already secured $8.5 billion in federal grants and $11 billion in loans through the CHIPS Act to support its foundry expansion plans. However, the company still faces a massive funding deficit, needing over $100 billion in capital over the next decade to construct new factories in Arizona, Ohio, New Mexico, Oregon, and abroad.
- Intel's struggles are compounded by data center market share losses to NVIDIA (NVDA, Financial) and Advanced Micro Devices (AMD, Financial). Intel's cash flow from operations for the six months ending July 1, 2024, was $1.07 billion, compared to $6.7 billion for the same period in 2022.
- Recently, it was reported that Intel is considering splitting its Product and Foundry segments to stop the financial bleeding. In Q2, the Foundry segment posted an operating loss of more than $2.8 billion, over $1 billion worse than the year-ago period. These losses, combined with declining sales in the Data Center and AI (DCAI) segment (-3% in Q2), led Intel to initiate a 15% workforce reduction and suspend its dividend.
- Intel may not split off the Foundry business, but selling non-core assets seems plausible. Last week, it was reported that Intel is considering selling part of its Mobileye (MBLY, Financial) stake. After spinning off Mobileye in an IPO in October 2022, Intel retained an 88% ownership stake in the autonomous driving technology chip maker.
After months of negative headlines, Intel is in dire need of a narrative shift. The new military contract offers some relief but does not address the underlying competitive issues facing the company.
