Intel shares powered higher in early Tuesday trading after the chipmaker unveiled major changes to its flagging business model and the details of a lucrative new contract with Amazon.
Intel (INTC) , which has struggled to align some of its legacy business units with its new focus on high-end-chip making, has lost billions in value this year and had its status in the Dow Jones Industrial Average questioned amid the slump.
The group aims to scale its business across the AI spectrum by making chips that power next-generation laptops and those that support processors for client-based servers.
It's also building and expanding a contract chip-foundry business tied to investments from President Joe Biden's Chips Act legislation, led by CEO Pat Gelsinger.
michelmond / Shutterstock
Gelsinger said that portion of the business, which has been seen as a drag on Intel's broader advance, is now likely to be carved out as an independent subsidiary with an independent board following a meeting planned after the group's weaker-than-expected second-quarter earnings.
Major Amazon deal
Its value was also enhanced late Monday by a deal with Amazon Web Services (AMZN) to make high-end chips and plans to pause the construction of a massive $32 billion foundry site in Germany for at least two years.
“This expansion of our longtime relationship with AWS reflects the strength of our process technology and delivers differentiated solutions for customer workloads,” Gelsinger said of the “multiyear, multibillion-dollar" deal.
“Intel’s chip design and manufacturing capabilities, combined with the comprehensive and broadly adopted cloud, AI and machine learning services of AWS, will unleash innovation across our shared ecosystem and support the growth of both businesses, as well as a sustainable domestic AI supply chain," he added.
Related: Intel stock tumbles as Dow status questioned amid turnaround slump
The group also confirmed reports of a $3 billion contract from the Chips and Science Act to develop highly sensitive components for the Department of Defense. And it said plans to sell its a portion of its Altera chip business, which it purchased for $16.7 billion in 2015, are still on track.
The cost-cutting tied to its plans to delay construction in Germany, as well as the infusions from the DoD and Amazon contracts, could give Intel more room to devote capital to its foundry business once its independent status is established.
Foundry growth is Intel's engine: CFRA analyst
CFRA senior equity analyst Angelo Zino in fact says the foundry unit could be Intel's "only real potential growth engine."
Related: Nvidia CEO Jensen Huang just forecast AI's future
"Intel's core business is being attacked on many fronts by chipmakers (such as Nvidia, AMD and Qualcomm) in the PC and data center markets while hyperscalers look to replace its (processors) with internally designed chips," Zino said in a recent client note. (The hyperscalers are the giant cloud-services and -infrastructure companies, like Alphabet's Google, Microsoft, Amazon and others.)
"Even if Intel rolls out its own accelerators in 2025, we expect it to dramatically lag peers," he added.
The Santa Clara, Calif., chip group's second-quarter earnings reflected that assessment. Adjusted profit for the three months ending in June came in at 2 cents a share, well shy of Wall Street's 10-cent forecast, and revenue fell 1.15% to $12.8 billion.
More Tech Stocks:
- Analysts reset AMD stock outlooks after AI acquisition
- Analyst resets Nvidia stock price target before earnings
- Trader who predicted Palantir, SoFi, Rocket Lab rallies updates outlook
Looking into the current quarter, Intel sees muted revenue in the region of $12.5 billion to $13.5 billion while unveiling plans to reduce its global headcount by 15% — more than 15,000 people — and suspend its quarterly dividend.
Intel shares were marked 6.9% higher in premarket trading to indicate an opening bell price of $22.36 each, a move would still leave the stock down nearly 50% for the year.
Related: Veteran fund manager sees world of pain coming for stocks
