Intel wins after closing a deal with Amazon, preparing to split the factory

(Bloomberg) — Shares of Intel Corp. rose for a second straight day after the troubled chipmaker made a series of announcements, fueling optimism that a turnaround plan is starting to bear fruit.

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In its most notable move, the company struck a multibillion-dollar deal with Amazon.com Inc.’s Amazon Web Services cloud unit. to invest in a custom AI semiconductor. Intel may also receive up to $3 billion in US government funding to make chips for the military. And it turns its struggling manufacturing business, or foundry, into a wholly owned subsidiary.

But the chipmaker is also pulling back in some areas. Intel said it would abandon plans for new factories in Germany and Poland — at least for now.

The news follows an Intel board meeting last week, during which executives outlined ways to save cash while maintaining CEO Pat Gelsinger’s long-term turnaround plan. The CEO’s effort hinges on turning Intel into a foundry, but the Santa Clara, Calif.-based company has been slow to line up its customers. A profile client like Amazon is a significant gain.

Intel shares rose as much as 8 percent to $22.58 on Tuesday, after a 6.4 percent gain the day before. They were down more than 60% by the end of last week.

Gelsinger, who embarked on a bold comeback effort for Intel in 2021, had to scale back some of his ambitions in the name of efficiency. With sales falling and losses mounting, the company last month announced plans to cut 15,000 jobs, find $10 billion in savings and suspend Intel’s dividend. It is now moving on to control expansion plans, especially overseas.

Construction projects in Poland and Germany will be discontinued for approximately two years, depending on market demand. Another in Malaysia will be completed, but will only be operational when conditions support it, Intel said.

The postponement of the German plant marks a setback for the European Union’s semiconductor ambitions and could reignite controversy in Berlin over where to allocate 10 billion euros ($11 billion) in earmarked subsidies.

Although Intel is freezing work on new factories in Germany and Poland, it said it remains committed to US expansion in Arizona, New Mexico, Oregon and Ohio.

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The move to separate Intel’s foundry operations from the rest of the company is partly aimed at convincing potential customers — some of whom compete with Intel — that they’re dealing with an independent supplier. Bloomberg previously reported that the company was weighing that option.

“We still have things to learn about how to become a foundry,” Gelsinger said in the interview. “I need a lot of customers.”

Intel is also looking to accelerate efforts to execute on $10 billion in cost savings and better focus its products on AI computing, an area where rival Nvidia Corp. he excelled. And it hopes to reduce its global holdings by about two-thirds by the end of the year.

In addition, the company reiterated plans to sell part of its stake in semiconductor maker Altera Corp. private equity investors. The business, which Intel bought in 2015, was spun off from its operations last year with a view to taking it public.

Amazon Web Services is the largest cloud computing provider and could help boost confidence that Intel can compete with foundry leader Taiwan Semiconductor Manufacturing Co. AWS has used Intel processors over the years, but has been more internally oriented. design – the very products that Intel can now help produce.

The two companies will invest in a custom semiconductor for artificial intelligence computing — what’s known as a chip fabric — in a “multi-year, multibillion-dollar framework,” according to a statement Monday. The work will be based on Intel’s 18A process, an advanced chip manufacturing technology.

“Today’s announcement is big,” Gelsinger said Monday of the deal. “This is a very demanding client that has very sophisticated design capabilities.”

Microsoft Corp., another major cloud computing provider, announced plans in February to use Intel for some of its internal chips as well.

In another win, Intel said earlier Monday that it was eligible to receive up to $3 billion in US government funding to make chips for the military. The effort, called the Secure Enclave, aims to establish a steady supply of state-of-the-art chips for defense and intelligence purposes. That news helped spark Monday’s rally.

The Secure Enclave award is separate from a possible $8.5 billion Chips and Science Act grant that Intel is set to receive to support factories in four US states. The projects include a facility in New Albany, Ohio, that Intel has said could become the world’s largest chip manufacturing operation.

Intel still has a long way to go to regain the full confidence of Wall Street. After years of losing ground to rivals and seeing its technological lead shrink, the Silicon Valley pioneer is valued at less than $100 billion. It no longer ranks as one of the top 10 chip companies on this basis. Nvidia, meanwhile, now has a market cap of about $2.9 trillion.

Intel shocked investors with a dismal financial report last month, triggering the stock’s biggest one-day drop in decades. Analysts described the announcement as Intel’s worst earnings report ever.

Gelsinger, in a letter to employees, acknowledged that the chipmaker’s performance had drawn negative attention — and fueled speculation about what might happen to the company. The only way to “quiet our critics” will be to get results and execute better, he said. This week’s announcements are a step in that direction, he said.

“Is it good enough? Not. Is it substantial? Yes,” he said in the interview. “I renewed my commitment. We will complete a fundamental mission.”

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