Intel to Unlock Value By Spinning Off Programmable Chip Unit

Key Points

• Intel plans to report its programmable chip unit as a standalone business from January 1, setting the stage for a future IPO.
• Intel will retain a majority stake in the new business while bringing in other investors.
• The move aligns with Intel's renewed focus on competing with rivals like AMD and Nvidia, emphasizing AI innovations.

Intel Corp. NASDAQ: INTC shares moved up 0.67% in trading volume slightly higher than average after the company said it would begin reporting its programmable chip unit as a standalone business on January 1. That move is a prelude to spinning off the unit in an IPO, which Intel expects to do sometime in the next two to three years. 

Intel is up 35.94% year-to-date, which isn’t bad, but it lags other S&P 500 tech stocks, including fellow chipmaker Nvidia Corp. NASDAQ: NVDA and other companies with greater AI exposure. 

Big Picture View: Intel's Programmable Chip Unit 

In a news release on October 3, Intel said Sandra Rivera would assume leadership of the Programmable Solutions Group as chief executive officer. Shannon Poulin has been named chief operating officer of PSG. Both are Intel veterans and have risen up through the corporate ranks. 

Intel also said it was separating the unit to enable potential private and public equity investments to “accelerate strategic repositioning of the business and drive substantial value creation.”

The move follows Intel’s 2022 spinoff of Mobileye Global Inc. NASDAQ: MBLY. Mobileye, which Intel acquired in 2017, specializes in advanced driver-assistance systems and autonomous driving technologies. 

In the release announcing the PSG separation, Intel said it would retain a majority stake in the new business, even as other investors are brought in.

Motivations Behind Intel's Spinoff Decision

Companies spin off business units for various strategic reasons. 

In Intel’s case, there are a few objectives. Intel acquired the programmable chip unit in 2015 when it purchased Altera, a semiconductor company specializing in programmable logic devices. This strategic move aimed to expand Intel's presence in the data center and Internet of Things markets.

Intel paid $16.7 billion for Altera; presumably, it would like to fetch a higher valuation in a spinoff. Some analysts have suggested that Intel is not confident that the PSG unit would command that price yet; hence the delay in spinning it off. 

Intel has been scrambling to catch up to rivals such as Advanced Micro Devices NASDAQ: AMD The two compete primarily in the markets for microprocessors and central processing units. 

The proposed spinoff of the Altera unit suggests that Intel believes it can unlock more shareholder value by setting it loose once again, especially as Intel tilts toward AI innovations. 

Impact on Intel's Business Strategy

Intel said the spinoff would boost performance of the programmable chip unit, which would benefit Intel if it intends to retain majority ownership. 

Intel is refocusing its operations to take on Nvidia and AMD more directly, so spinning off a business unit that’s not directly related to that focus could free up resources. 

Proceeds from the PSG spinoff could be redeployed into AI operations, as well as the company’s expansion of its contract chip manufacturing operations, a pet project of Intel CEO Pat Gelsinger. 

However, that effort has gotten bogged down. For example, smartphone chipmaker Qualcomm Inc. NASDAQ: QCOM and Tesla Inc. (NASDAQ: TSLA) reportedly looked into having Intel manufacture its chips, but were not satisfied with what they saw. 

Gelsinger took the helm at Intel in 2021, and has zeroed in on ways to restore the company to its former glory as other chipmakers embraced innovation while Intel languished. 

Wall Street’s View of Proposed Spinoff

MarketBeat’s Intel analyst ratings show a consensus view of “hold,” with a price target of $34.24, and a downside of 4.59%. 

After the company announced the spinoff, there were several analyst actions.

• Needham & Co. reiterated its “buy” rating with a price target of $40.
• Roth MKM reiterated its “neutral” rating with a price target of $35. 
• Northland Securities boosted its price target to $56 from $45, maintaining its “outperform” rating.
• Rosenblatt Securities reiterated its “sell” rating.

Other analysts weighed in with notes on Intel’s action. 

Morningstar’s Brian Colello maintained his $35 fair value estimate on Intel. “We like the move for Intel as it will raise capital for the company and narrow its focus on achieving chip manufacturing process leadership,” he wrote.