Intel shares powered higher in early Tuesday trading after the chipmaker unveiled some major changes to its flagging business model as well as 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 chipmaking, has lost billions in value so far this year and had its status in the Dow Jones Industrial Average questioned amid the ongoing slump.
The group is aiming to scale its business across the AI spectrum by making chips that power next-generation laptops as well as 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 under the leadership of CEO Pat Gelsinger.
Intel said it will carve out its foundry business as an independent entity as part of a major overhaul for the struggling chipmaker.
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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, Gelsinger said, with an independent board, following a meeting planned after the group’s weaker-than-expected second quarter earnings.
Major Amazon deal
It’s value was also enhanced late Monday by a deal with Amazon Web Services (AMZN) to make high-end chips, as well as 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.
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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 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 engine
CFRA senior equity analyst Angelo Zino, in fact, thinks the foundry unit could be Intel’s “only real potential growth engine”.
“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.
Related: Analyst says Intel should drop a key business to survive
“Even if Intel rolls out its own accelerators in 2025, we expect it to dramatically lag peers,” he added.
The group’s second quarter earnings reflected that assessment, as 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 revenues fell 1.15% to $12.8 billion.
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Looking into the current quarter, Intel sees muted revenues 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 6.8% higher in premarket trading to indicate an opening bell price of $22.34 each, a move that would still leave the stock down nearly 50% for the year.
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