Investors reacted positively to Nvidia’s announcement of a $5 billion stake in Intel, which resulted in a remarkable 30% surge in Intel’s stock value on Thursday. The agreement, granting Nvidia a 4% equity stake in Intel, includes Nvidia’s commitment to utilizing Intel’s CPUs in its AI data center server systems, while Intel will incorporate Nvidia’s AI technology into semiconductors for personal computers.
However, this deal does little to address Intel’s most pressing challenge: its struggling contract chip manufacturing arm, Intel Foundry Services. This segment has become a focal point for both investors and the US government, particularly as the rise of AI continues to reshape the semiconductor market.
Intel, traditionally known for producing its own semiconductors, launched Intel Foundry Services in 2021 under former CEO Pat Gelsinger. The initiative aimed to regain market share through external customer commitments and involved significant investments in new manufacturing facilities. Despite initial optimism, the venture has fallen short, experiencing escalating losses that reached $13 billion in the 2024 fiscal year, significantly up from $7 billion just a year earlier. This alarming trend contributed to a staggering 60% decline in Intel’s stock value last year, culminating in Gelsinger’s removal by the company’s board in December.
Wall Street analysts identify the foundry business as Intel’s foremost concern. There is ongoing debate regarding its future, with some suggesting a sale could alleviate financial strains, while others caution that this would hinder Intel’s cost-effectiveness in chip production due to the loss of economies of scale. Analyst Angelo Zino from CFRA expressed doubts about the foundry’s profitability, predicting continued cash losses through at least 2027.
During a press briefing following the Nvidia deal, the executives of both companies left open the possibility of Nvidia eventually becoming a customer of Intel Foundry Services. However, they indicated immediate plans to partner with Intel’s competitor, TSMC, for the production of newly designed chips.
The US government has a vested interest in the viability of Intel’s manufacturing operations, given that it represents the only major advanced chipmaker in the country and produces chips for the Department of Defense. While TSMC is expanding its manufacturing capabilities in the US, the majority of its production and critical R&D remains in Taiwan. This dependence poses risks, particularly in light of concerns surrounding potential geopolitical conflicts involving China.
Analyst Anshel Sag expressed surprise that the Nvidia-Intel agreement did not include any commitments to Intel’s foundry services, especially considering Nvidia’s desire to diversify its supply chain away from TSMC. The US government has also recently acquired a 10% stake in Intel, indicating its interest in the company’s performance.
Despite the focus of the Nvidia-Intel agreement on product collaboration, Zino believes it enhances Intel’s credibility, which could eventually benefit its manufacturing segment. He suggested that it’s plausible Nvidia might begin to explore Intel’s foundry services in the future, potentially starting with minor contracts.
As developments continue to unfold in this dynamic sector, the implications for both companies and the broader semiconductor market remain significant.
