Intel’s Spin-Off Strategy: A Bargain Hiding in Plain Sight?

Key Points

• Intel’s turnaround plan includes $10 billion in cost cuts, 15,000 layoffs, and the spinoff of its Intel Foundry division.
• Northland Capital Markets believes Intel's parts, comprised of Intel Foundry, Altera, IP, a majority stake in Mobile Eye, along with the AWS deal and government subsidies, are worth $42.00 per share.
• Rumors are swirling that Qualcomm has approached Intel for takeover talks.

Semiconductor manufacturer Intel Co. NASDAQ: INTC has lost its luster among investors, trading down 56.5% year-to-date (YTD). The chip giant has consecutively disappointed with its weak guidance, souring investor sentiment as the artificial intelligence (AI) boom lifted competitors like NVIDIA Co. NASDAQ: NVDA and Advanced Micro Devices Inc. NASDAQ: AMD and passed by Intel. Both companies don't have to worry about constructing and maintaining capital-intensive semiconductor fabrication plants (FABs) since they outsource production to Taiwan Semiconductor Manufacturing Co. Ltd. NYSE: TSM.

The company’s turnaround strategy has been implementing $10 billion in cost cuts and a headcount reduction of 15,000 workers, which is halfway through but continues to wallow in its misery. The stock is trading at levels not seen since 2012. 

However, the struggling computer and technology sector giant may offer upside potential for new investors as it seeks alternative strategies to enhance shareholder value.

The Multi-Billion Dollar Amazon AWS Deal

Intel owns its FABs and created Intel Foundry Services (IFS) to provide semiconductor manufacturing services to external customers, like Taiwan Semi. IFS is a separate business unit within Intel. Intel recently announced a co-investment deal with Amazon.com Inc. NASDAQ: AMZN Amazon Web Services (AWS) under a multi-billion-dollar and multi-year framework covering products and wafers from Intel. Intel will produce AI chips for AWS on its most advanced process node, Intel 18A.

It will also build custom Xeon 6 chips on Intel 3 in addition to its deal to produce Xeon Scalable processors. Amazon will invest $7.8 billion to expand its data center operations in Central Ohio. There is speculation that Microsoft Co. NASDAQ: MSFT may also be interested in Intel's next-gen AI chips.

Intel Foundry Will Be Spun Off, But Not as a Public Company Yet

Intel also announced its plans to spin off its Intel Foundry segment into an independent company with its board of directors and financials. A spin-off could also enable it to attain independent funding sources, which is a relief for Intel as it’s already drained nearly $50 billion from its war chest in the past two years. A spin-off would help Intel improve its financials and core chip architecture development and design business. While Intel Foundry would be its own independently operated subsidiary, Intel hasn’t announced it is a total independent spin-off as a new public company. That’s the real announcement that could boost Intel stock.

Due to market demand, the construction of two factories in Germany and Poland will also be halted. Northland Capital Markets reiterated its Outperform rating and $42.00 price target, citing the potential from the spin-off of its foundry business.

Intel’s Spin-Off of Altera 

Intel spun off its field-programmable gate array (FPGA) solutions business as a standalone company, Altera, earlier in 2024. Altera was originally acquired for $16.7 billion in 2015. It provides a cheaper alternative to expensive application-specific integrated circuits (ASICs). The new company wants to expand into trends like 6G wireless, Ethernet, and compute express link (CXL). Intel plans on a potential IPO in the coming years.

Intel’s Stake in Mobile Eye

Intel still owns over 80% of Mobile Eye Inc. NASDAQ: MBLY, an advanced driver assistance systems (ADAS) chip maker. While there have been rumors of Intel looking to sell some of its majority stake, the company confirmed that it wasn’t interested in selling its shares, which have incidentally dropped 71% in 2024.

Qualcomm Buyout Rumors

The Wall Street Journal reported that Qualcomm Inc. NASDAQ: QCOM had recently approached Intel for a potential acquisition. While Qualcomm is a competitor with Intel in the personal computer (PC) and laptop segment, it doesn't manufacture its chips. It outsources them to Taiwan Semiconductor Manufacturing and Samsung Electronics OTCMKTS: SSNLF. However, any deal would have to receive U.S. government approval due to the perceived antitrust and national security threat it may trigger. Nonetheless, the buyout potential for Intel continues to loom for any major semiconductor company looking to produce its chips.

Bottom line: The sum of all its parts could be worth more than the 12-year lows at which Intel shares are currently trading.

INTC Stock Attempts a Rectangle Channel Breakout

A rectangle channel pattern is comprised of a flat-top upper trendline resistance and a flat-bottom lower trendline support. A breakout occurs when the stock surges through the upper trendline, and a breakdown occurs when the stock falls below the lower trendline.

INTC gapped down on its Q2 2024 earnings dump to the $21.98 lower gap fill from the $28.89 upper gap fill level. INTC formed a flat-bottom lower trendline support at $18.56 and a flat-top upper trendline resistance at $21.98. The anchored VWAP is trying to hold support at $20.93. The daily relative strength index (RSI) is rising to the 53-band. Fibonacci (Fib) pullback support levels are at $20.66, $19.76, $18.56, and $15.59.

Intel’s average consensus price target is $32.04, and its highest analyst price target is $42.00.  

Bullish investors can buy on pullbacks using cash-secured puts at the fib pullback support levels to buy the dip. Bullish investors with a longer time frame who want to spend less capital can consider buying out-of-the-money (OTM) directional LEAPS call options.

Bullish options investors can limit maximum downside and profit from modest upside gains for less capital than owning the stock by implementing a bullish call debit spread.