Intel: Maintaining Fair Value Estimate as Intel Foundry Receives Outside Support

Intel (INTC) shares surged 7% following announcements that SoftBank will invest $2 billion by purchasing stock at $23 per share, and the U.S. government is nearing a deal for a 10% equity stake utilizing CHIPS Act funds. These strategic investments are seen as critical for bolstering Intel's foundry business, enhancing its ability to secure external customers for advanced chip manufacturing (14A), and potentially leading to ARM utilizing Intel's foundry services. Despite these developments bringing a more bullish scenario closer, Morningstar maintains its $21 fair value estimate and 'Very High Uncertainty' rating, citing the continued need for substantial capital investment and potential long-term profitability concerns stemming from government involvement and pricing pressures.

Analysis

Intel's stock surged 7% following news of two significant capital injections: a $2 billion investment from SoftBank at $23 per share and a prospective 10% equity stake from the U.S. government funded by the CHIPS Act. These investments are critical for bolstering Intel's foundry business and its ability to finance advanced chip manufacturing for the Intel 14A process, especially after failing to secure significant external customers for its 18A node. The government's involvement could potentially compel U.S. fabless chip designers to utilize Intel's services, while the SoftBank stake may pave the way for ARM to become a key foundry customer. Despite these positive catalysts, significant uncertainty remains. Morningstar maintains its $21 fair value estimate and "Very High Uncertainty" rating, highlighting that the 14A process is likely uneconomical without substantial external orders and that Intel must still commit to heavy capital expenditure. Furthermore, the long-term profitability of the foundry is questionable due to potential government-enforced pricing concessions or the imposition of new taxes on foundry revenue, similar to proposals for Nvidia's and AMD's sales to China.

Key Decisions for Investors

• The strategic investments from SoftBank and the U.S. government materially de-risk Intel's foundry strategy, suggesting long-term investors may re-evaluate the company's turnaround potential.
• Investors should closely monitor for definitive external customer commitments for the 14A process, as its economic viability is explicitly contingent on securing these orders.
• Be cautious of the long-term margin profile, as significant government ownership could lead to pricing concessions or new taxes that may suppress the profitability of the foundry business.
• Given that Morningstar's $21 fair value estimate is below SoftBank's $23 investment price, investors should consider that near-term optimism following the 7% stock rally may already be priced into the shares.