NVIDIA's (NVDA) announcement that it would spend $5 billion to acquire a stake in Intel (INTC) may have cheered investors, with the latter's stock price soaring as much as 30% on Thursday. But the investment will do little to solve Intel's biggest problem: how to turn around its troubled chip foundry business.
Under the agreement (Nvidia will acquire 4% of Intel's shares), Nvidia will use Intel's central processing units (CPUs) in its artificial intelligence data center server systems, and Intel will use Nvidia's artificial intelligence technology in its personal computer chips.
But crucially, the agreement makes no mention of Intel's manufacturing business unit, Intel Foundry Services. This sector has not only received widespread attention from investors and the U.S. government, but has also fallen into huge losses as artificial intelligence disrupts the chip market.
Intel has always produced its own semiconductors, but will open its manufacturing operations to external customers in 2021. The chipmaker, then run by former CEO Pat Gelsinger, launched Intel's foundry services in an attempt to revive its product business as rivals took share away from it. The plan involves spending hundreds of billions of dollars to build new factories to produce chips for other companies.
But Gelsinger's high expectations for the business were largely dashed by a lack of big customer commitments. Losses from Intel's foundry services division surged from $7 billion in fiscal 2023 to $13 billion in fiscal 2024. Those losses caused Intel's stock price to plummet 60% last year. Gelsinger was ousted by the company's board of directors in December.
Wall Street analysts pointed out that the foundry business remains Intel's most difficult problem. Some people advocate selling the business, while others point out that doing so will increase Intel's chip production costs due to economies of scale.
"The business will continue to bleed cash through at least 2027," CFRA analyst Angelo Zino told Yahoo Finance.
Citigroup (C) analyst Chris Danley downgraded Intel stock on Friday, noting that recent gains have been overdone given the "little chance of success" in its foundry business.
At a press conference announcing the agreement on Thursday, the CEOs of Intel and Nvidia did not rule out the possibility of Nvidia becoming an Intel foundry services customer. But they indicated that in the short term the companies would work with Intel rival Taiwan Semiconductor Manufacturing Company (TSM) to produce newly designed chips.
At the same time, the United States has interests in the success of Intel's manufacturing operations. Intel is the only major high-end chipmaker in the United States and produces chips for the Department of Defense. Most of the world's most advanced chips are manufactured by Taiwan Semiconductor Manufacturing Company.
Although TSMC is expanding U.S. manufacturing, most of its production capacity is still located in Taiwan and key research and development work is completed locally. Given the continued risk of China's armed attack on Taiwan, experts say the survival of Intel's manufacturing operations is critical to national security.
Moor Insights & Strategy analyst Anshel Sager told Yahoo Finance that he was surprised that Thursday's agreement did not include an order for Intel's foundry services business.
"In fact, I originally expected that with the intervention of the US government, Nvidia would announce some kind of foundry agreement with Intel." He pointed out that Nvidia also intends to make the supply chain independent of TSMC. The U.S. government recently acquired a 10% stake in Intel.
Although the Nvidia-Intel agreement focuses entirely on Intel's product division, Zino believes that the agreement strengthens the chipmaker's credibility and is beneficial to its manufacturing operations.
Zino said that this agreement may at least allow Nvidia to start testing Intel's foundry services at some stage: "In the future, we may see Nvidia start to provide symbolic orders to Intel."