Huge News for Intel Stock. Is it time to buy?

Huge news has come for Intel (INTC 3.30%) recently as it announced an expanded partnership with Amazonhis (AMZN 1.19%) cloud computing division called Amazon Web Services (AWS). The partnership revolves around commitments to co-design new computer chips on Intel architecture, as well as commitments to spend on new Intel manufacturing plants.

Intel shares rose about 10% on the news, but have since fallen again. The stock remains down about 70% from its 10-year high due to competitive pressures from other computer chipmakers and as Intel has lagged behind in advanced semiconductor production in recent years. However, I wouldn’t discount this news from Amazon, which is one of, if not the biggest, computer chip spender globally. It is committed to Intel despite growing doubts about the once-dominant computer chip maker.

Does this mean you should commit to Intel stock?

A helping hand Amazon

AWS is the largest cloud computing provider. The lifeblood of a cloud computing business is self-explanatory: it’s built on computer chips. That’s why Amazon is such a big buyer of semiconductors, spending roughly tens of billions of dollars on computing products and related services to power its monster data centers.

Intel has historically been a huge supplier to AWS and other data center customers, but has fallen behind in the artificial intelligence (AI) era to the likes of Nvidia and Advanced microdevices. Given Nvidia’s superiority in this new field, the company was able to implement extreme price increases for its customers like AWS. This has helped drive Nvidia’s stock up 2,500% over the past five years.

All of this means that Amazon and Intel’s partnership makes sense. Intel needs financial commitments to close the gap with Nvidia, and Amazon would like more competition so Nvidia can’t implement huge price increases when selling to AWS.

In the long run, this may save Amazon money by making it less dependent on Nvidia, while providing a buffer to spend billions on Intel’s future computer chip products. The partnership is interesting because both Intel and Amazon will invest in co-designing advanced computer chips. That means companies will work hand in hand to catch the competition.

Building subsidized US factories

Part of the Intel-Amazon partnership is chip design. The other — and perhaps more important — part is that the chips will be custom-designed for Intel’s new manufacturing plants in Ohio. Intel is spending tens of billions of dollars on these factories to build its new foundry business, which means making computer chips for third parties like Amazon. In the past, Intel was vertically integrated and only manufactured its own chip designs, but this has caused it to lag behind technologically for the past 10 years.

So far, Intel’s foundry business isn’t doing well. It generated just $4.3 billion last quarter and had an operating loss of $2.8 billion. To make the business profitable, Intel will need huge commitments from customers to cover the high fixed costs of the manufacturing facilities. Securing Amazon as a customer is a great first step.

Finally, investors should be wary of Intel’s grants from the United States government. Through the CHIPS Act, the US subsidizes chip production to help offset geopolitical risks with China. Intel has already received $3 billion for defense-focused chip designs, which is a good start, but it will be a big help if more comes out.

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Rough seas but light at the end of the tunnel

Intel’s financials look tough right now. The company is burning through more than $12 billion in free cash flow each year as it loses customers to Nvidia and invests in new foundry manufacturing facilities. In a vacuum, the stock looks uninvestable, even though it’s down 70% from all-time highs.

This may be the worst Intel layout ever. The US government wants it to succeed and probably won’t let the company fail, more subsidies will likely come its way. Amazon spends a lot on computer chips every year, and it just reaffirmed its position against Intel. Intel has nearly $30 billion in cash and cash equivalents on its balance sheet, which will help with the temporary cash burn. The headwinds from foundry construction will diminish once these expensive production plants are up and running.

Add it all up and I think it makes sense to go junk for Intel stock right now. This is a once-beloved brand that many want — some might say need — to succeed. Consider buying Intel stock and holding it for the long term.