Intel announces AWS partnership; Is now the time to buy?

Intel's recent partnership with Amazon Web Services (AWS) to produce custom AI chips marks a pivotal moment for the semiconductor giant as it seeks to regain relevance in an industry increasingly dominated by competitors like Nvidia and TSMC. The multibillion-dollar deal with AWS, under which Intel will develop an "AI fabric chip" using its advanced 18A manufacturing process, offers a valuable opportunity for Intel to prove its capabilities in the AI space. AWS, a key player in the cloud computing industry, has been relying on TSMC for much of its AI chip production, so Intel’s involvement provides a chance for the company to demonstrate its technological prowess and ability to deliver at scale.

This deal expands Intel's long-standing relationship with AWS, which has used Intel chips in its data centers for years. However, the focus on AI and custom silicon now gives Intel a stronger foothold in the rapidly growing market for AI-driven cloud services. While the partnership with AWS provides Intel with a high-profile client and potential for volume orders, there are still lingering questions about the scope of the deal. Amazon has yet to make a full transition away from TSMC, and Intel will need to deliver exceptional performance with its 18A chips to convince AWS to deepen the relationship. The significance of this deal lies not only in revenue potential but also in the credibility it gives Intel as a foundry player capable of handling custom AI silicon.

Despite the positive news, Intel continues to face a range of challenges that cloud its long-term outlook. One of the biggest concerns is whether the company can successfully execute its ambitious foundry plans. While Intel CEO Pat Gelsinger has laid out an extensive turnaround strategy centered on building Intel’s foundry business, meaningful revenue from these efforts is not expected until 2027. This leaves Intel in a precarious position as it burns through cash to fund these capital-intensive projects while also dealing with the competitive pressures from more agile players like TSMC and Samsung. The delays in Intel’s European factory projects, such as in Poland and Germany, further exacerbate the situation, raising doubts about Intel’s ability to ramp up its global manufacturing footprint on time.

Another concern for Intel is the market’s perception of its overall financial health. The company’s stock has plunged nearly 60% this year, reflecting investor unease about its ability to compete in the AI space. The recent restructuring announcements, which include plans to cut 15,000 jobs and exit two-thirds of its global real estate, are seen as necessary measures for cost control. However, they also signal just how much Intel is struggling to streamline operations. Additionally, there are still questions surrounding Intel's 18A process node, as analysts at BAML pointed out that no update on its success was provided during recent announcements. Without more transparency on the progress of its key technology, investor confidence remains fragile.

On the upside, Intel's strategic importance to the U.S. government cannot be understated. The company is a critical player in ensuring a secure, domestic semiconductor supply chain, particularly for the Department of Defense (DoD). This makes Intel a strong candidate for continued government funding, as evidenced by the recent $3 billion award under the CHIPS Act for the Secure Enclave program. Intel’s unique position as the only U.S.-based company capable of designing and manufacturing leading-edge logic chips solidifies its role in national security, and this relationship with the government is expected to provide a steady stream of financial support, particularly in the face of global supply chain concerns.

Intel has also been making strides with its cost-cutting initiatives and organizational restructuring, which are starting to show some positive effects. The company is more than halfway through its $10 billion cost-saving plan, which includes significant reductions in its workforce and real estate footprint. The decision to establish Intel Foundry Services (IFS) as an independent subsidiary is another move aimed at reducing conflicts of interest between Intel’s product design and foundry businesses. By allowing IFS to operate autonomously, Intel aims to gain trust from third-party clients who might otherwise be hesitant to partner with a company that also competes with them in chip design. This shift could open the door for more foundry contracts and help Intel achieve its ambitious goals in the space.

The partnership with AWS, along with the recent grants from the U.S. government, is providing Intel with the momentum it needs to kickstart its turnaround. The AWS deal serves as an important vote of confidence in Intel’s ability to produce high-performance AI chips, while the CHIPS Act funding helps alleviate some of the financial pressure associated with its ongoing transformation. These developments suggest that Intel is beginning to position itself as a serious competitor to the likes of TSMC and Samsung, particularly as geopolitical tensions heighten the need for domestic chip manufacturing capabilities.

Furthermore, Intel's long-term potential remains substantial given the size of the semiconductor market and the growing demand for advanced chips in sectors like AI, cloud computing, and defense. The company’s focus on its 18A manufacturing process, which is expected to lead the industry in 2025, indicates that Intel is not merely playing catch-up but aiming to reclaim its leadership in cutting-edge technology. If Intel can successfully execute its turnaround strategy, the combination of government support, high-profile client wins, and technological advancements could pave the way for a more favorable outlook for the stock in the years to come.

Intel's stock performance has been underwhelming, but these recent developments provide a glimpse of what could be a meaningful recovery. The AWS partnership, in particular, has given investors a reason to pay closer attention to Intel’s progress in AI and foundry services. While the road ahead is fraught with challenges, there is optimism that Intel’s renewed focus on innovation and cost discipline could help it regain its competitive edge in the global semiconductor industry.

Shares of INTC jumped 10% in reaction to the AWS news. However, the stock is giving up some of those early gains to come in and test the August high ($22.12) in early trade. We would expect to see that level hold and for the stock to press back up toward the $23 level. However, there still remains plenty of risk around the execution. We would prefer to see evidence of a turnaround before putting a lot of money to work here. Therefore, investors would be advised to start a "seed" position or