Intel secures another government contract; Will it change its fortunes?

Intel has been awarded up to $3.5 billion in funding from the U.S. Department of Defense under the Biden-Harris administration's CHIPS and Science Act as part of the Secure Enclave program. This initiative is aimed at bolstering the U.S. government's capacity to manufacture advanced, secure semiconductors domestically for military and intelligence applications. Intel, as the only U.S. company that designs and manufactures cutting-edge logic chips, is in a pivotal position to help secure the country's semiconductor supply chain. The award builds on Intel’s previous collaborations with the Department of Defense, such as the Rapid Assured Microelectronics Prototypes - Commercial (RAMP-C) and the State-of-the-Art Heterogeneous Integration Prototype (SHIP) programs.

This $3.5 billion contract adds to the substantial $8.5 billion in grants and $11 billion in loans Intel was awarded earlier in the year under the same act, signaling strong governmental support for Intel’s mission to enhance U.S. chip manufacturing. The funding is intended to further Intel’s efforts in developing its semiconductor fabrication business, which is key to both national security and economic stability, especially given global reliance on Taiwan Semiconductor Manufacturing Co. (TSMC) for advanced chips. This move is part of a broader U.S. strategy to reduce reliance on foreign manufacturers for critical technologies, particularly in light of geopolitical tensions.

Intel's stock saw a boost of 4.2% following the announcement of the contract, reflecting investor optimism about the company's ability to capitalize on government support for domestic chip production. The news reassures investors that, despite recent financial difficulties and increasing competition in the AI chip market, Intel remains central to the U.S.'s efforts to re-establish its semiconductor dominance. However, Intel's struggles, including missing out on key deals such as the PlayStation 6 chip contract to Advanced Micro Devices (AMD) and TSMC, indicate that the company still faces significant challenges in regaining its leadership position in the industry.

While Intel’s secure enclave award is a positive step, it highlights the broader challenges the company faces. Intel is undergoing a strategic transformation, investing heavily in new fabrication technologies and innovation, such as the Intel 18A technology, which is on track for production in 2025. The company is also dealing with internal restructuring efforts to address its declining market share and financial performance. As Intel continues to invest in its future, the ongoing support from the U.S. government provides a crucial lifeline, giving it the resources necessary to maintain its relevance in a rapidly evolving and highly competitive semiconductor landscape.

Should You Buy Intel?

In September, U.S. stocks experienced a sluggish start, with large-cap technology stocks, particularly in the artificial intelligence (AI) space, underperforming. Concerns about the American economy, driven by the weak August jobs report, contributed to this decline. AI stocks were hit especially hard, with losses ranging from 4% to over 20% during the first week. Many investors have grown dissatisfied with the growth shown by AI companies, and questions about the sustainability of AI's hype have increased. Despite this, opinions remain divided, with some experts suggesting that the market is overly focused on AI without considering the more sustainable players.

Intel has been one of the notable underperformers in this period, with its stock declining over 11% in the first week of September. Reports that Intel might lose its place in the Dow Jones Industrial Average, along with rumors of Qualcomm eyeing portions of its business, have raised red flags for investors. While some see a potential Qualcomm acquisition as a positive for Intel, others worry about the loss of key segments, particularly its PC chip design division, which could impact the company's long-term innovation and profitability.

Intel's recent financial performance has further dampened investor sentiment. Its second-quarter earnings report showed a 1% revenue decline, and its guidance for the third quarter projected an 8% drop in revenue. Additionally, the company eliminated its dividend to conserve cash, a move that, while practical, has disappointed many investors. As a result, Intel's stock struggles reflect broader concerns about its future, and many analysts advise caution for those considering an investment in the company.

Shares of INTC have been hovering around the $20 mark for the past seven weeks, following a sharp drop from $30 to $20 in early August after another disappointing earnings report. Since then, the stock has struggled to gain momentum, with buyers remaining relatively inactive. The highest point since the Q2 earnings release was $22.12, reached on August 30. A move above this level would be an encouraging sign, indicating that buyer sentiment may be shifting.

While the recent government contract is a positive development, it's important to note that this isn’t the first time Intel has received such support from the U.S. government. The bigger concern is whether these contracts will be viewed as a worthwhile investment, given Intel's track record of poor execution over the past three years. For now, we would prefer to wait and see if Intel can break through the $22 level, demonstrating a stronger commitment from buyers, before considering any investment.