Intel also announced a $3B in U.S. government CHIPS funding and a pause in certain investments in Poland and Germany Shares of Intel (INTC) are on the rise on Tuesday after the company announced a chip-making deal with Amazon's (AMZN) AWS and said it's foundry business would become a wholly owned subsidiary. Deutsche Bank believes Intel's foundry momentum in "gaining steam" with the AWS news, while Citi tells investors it still believes Intel should exit the foundry business.
INTEL, AWS DEAL: Intel and Amazon Web Services, or AWS, an Amazon.com company, announced a co-investment in custom chip designs under a multi-year, multi-billion-dollar framework covering product and wafers from Intel. This is a significant expansion of the two companies' longstanding strategic collaboration to help customers power virtually any workload and accelerate the performance of artificial intelligence applications. As part of the expanded collaboration, Intel will produce an AI fabric chip for AWS on Intel 18A, the company's most advanced process node. Intel will also produce a custom Xeon 6 chip on Intel 3, building on the existing partnership under which Intel produces Xeon Scalable processors for AWS. Intel continues to be committed to the New Albany area and its plans to build leading edge semiconductor manufacturing. AWS is planning to invest $7.8B to expand its data center operations in Central Ohio, in addition to the $10.3B it has invested in the state of Ohio since 2015.
In other deal news, the Biden-Harris Administration announced that Intel has been awarded up to $3B in direct funding under the CHIPS and Science Act for the Secure Enclave program. "The Secure Enclave program builds on previous projects between Intel and the Department of Defense… Intel will help secure the domestic chip supply chain and collaborate with the DoD to help enhance the resilience of U.S. technological systems by advancing secure, cutting-edge solutions. The Secure Enclave award is separate from the proposed funding agreement that Intel reached with the Biden-Harris Administration in March of this year to support the construction and modernization of semiconductor commercial fabrication facilities under the CHIPS and Science Act," the company stated.
INDEPENDENT SUBSIDIARY: Intel CEO Pat Gelsinger sent a note to staff saying that, to build on the company's progress, it intends to establish Intel Foundry as an independent subsidiary inside of Intel. "This governance structure will complete the process we initiated earlier this year when the company separated the P&L and financial reporting for Intel Foundry and Intel Products." "A subsidiary structure will unlock important benefits," Gelsinger said. "It provides our external foundry customers and suppliers with clearer separation and independence from the rest of Intel. Importantly, it also gives us future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation. There is no change to our Intel Foundry leadership team, which continues to report to me."
The CEO added that the company recently increased capacity in Europe through its fab in Ireland, which will remain its lead European hub for the foreseeable future. "We will pause our projects in Poland and Germany by approximately two years based on anticipated market demand," he added. "We remain committed to our U.S. manufacturing investments and are moving forward with our projects in Arizona, Oregon, New Mexico and Ohio."
WORKFORCE REDUCTION TARGET: Intel CEO Pat Gelsinger also said in a note to staff that the company is more than halfway to its workforce reduction target of roughly 15,000 by the end of the year, mostly through voluntary early retirement and separation offerings.
GAINING STEAM: Deutsche Bank says the most material news from Intel last night was the multi-year, multi-billion dollar partnership with Amazon Web Services to produce an arterial intelligence fabric chip on 18A, as well as engagements for additional foundry designs on Intel 18A, Intel 18AP, and Intel 14A. Away from the foundry business, the AWS collaboration also involves production of custom Xeon 6 processors on Intel 3, the firm notes. Deutsche believes Intel's foundry momentum is "gaining steam" with the AWS news and the Secure Enclave award. In addition to the foundry customer news, Intel made several announcements aligning to the cost reduction goals it set out on its last earnings call, contends Deutsche Bank. The firm keeps a Hold rating on the shares with a $27 price target.
SHOULD EXIT FOUNDRY BIZ: Reiterating a Neutral rating on Intel's shares with a price target of $25 after the company announced a multi-billion deal with Amazon Web Services to supply AWS with custom Xeon chips and produce an artificial intelligence fabric chips, Citi says it does not count the Xeon win as a true "foundry" win since these chips are something Intel already makes. The firm is also concerned "customizing" a Xeon could be a lower margin product. Intel also announced it has been awarded up to $3B in business from the U.S. government, "which is a mild positive," Citi adds. However, the firm does expect this to be material given that it is over several years. The firm continues to believe Intel should exit the foundry business.
INCREMENTAL POSITIVES: Evercore ISI views the developments as "incremental positives," but maintains an In-Line rating and $25 price target on Intel shares until there is increased visibility into success of its foundry business. Intel plans to establish IFS as an independent subsidiary, which Evercore views as a positive as it increases transparency of Intel's manufacturing business, and enables accountability, benchmarking to best practices and a focus on execution. The company also said it plans to increase capital efficiency, with a focus on capacity in Ireland, Arizona, Oregon, New Mexico and Ohio, and completing its advanced packaging fab in Malaysia; plans a focus on x86, including AI PCs and the data center; and noted that it is halfway to its 15,000 person reduction-in-force goal.
JPMorgan also views Intel's announcements last night as better clarification on previously announced actions and not incremental changes. For the foundry business, Intel has not changed its view of meaningful revenue ramp by external foundry customers until 2027, although the pipeline continues to build, the firm tells investors in a research note. That said, the company did announce an expanded strategic collaboration with Amazon Web Services, which should add some incremental confidence on its expanding customer pipeline, adds JPMorgan. The firm keeps an Underweight rating on Intel with a $26 price target.
MORE QUESTIONS THAN ANSWERS: Commenting on the announcements, BofA noted that there was no new financial model provided, that it is unclear if the Foundry move means anything beyond a different reporting structure nor were there any updates on success of the critical 18A manufacturing node. The AWS win "sounds impressive," but Intel has already been supplying AWS with CPUs for a long time, so customization isn't exactly something new, says the firm. The AI fabric win on 18A will probably matter only from calendar year 2026 while competing against tough Ethernet switch incumbency from Broadcom (AVGO) and others, adds BofA, which keeps an Underperform rating and $21 price target on Intel shares.
PRICE ACTION: In Tuesday morning trading, shares of Intel have gained almost 6% to $22.10
