Intel Investors: Don’t Count on Qualcomm to Save the Day

Intelhis (INTC -0.04%) stock has halved this year as the chipmaker has struggled with slowing sales, shrinking gross margins and its inability to catch up Taiwan Semiconductor Manufacturing and Samsung in the high-end foundry market. Those challenges have led it to suspend its dividend, lay off more than 15 percent of its workforce, and even consider selling or spinning off its foundry and programmable chip divisions.

However, Intel shares recently rose amid rumors that Qualcomm (QCOM -1.47%) could consider a takeover of the troubled chip maker. The deal would create a chipmaking titan by merging Intel’s x86 processors, which lead the PC and server market, with Qualcomm’s mobile system-on-chips (SoCs), which ranks second in the smartphone SoC market by MediaTek. That sounds like a win-win situation for both chipmakers, but I don’t think it will happen for four simple reasons.

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1. It would never be approved by antitrust regulators

Intel still controls 61.5% of the x86 processor market, according to PassMark Software, while its main competitor Advanced microdevices holds a share of 35.8%. Qualcomm’s Snapdragon chips account for 31 percent of the mobile SoC market, according to Counterpoint Research, while MediaTek has a 32 percent share.

Qualcomm and MediaTek are also the world’s two largest manufacturers of Arm-chips on base. Combining the x86 and Arm architectures under one roof could draw fierce objections from other chipmakers and antitrust regulators. Antitrust pressure also forced Nvidia to abandon the attempted takeover of Arm in 2022.

2. Their business models are inappropriate

Qualcomm is a no-nonsense chipmaker that outsources all of its production to third-party foundries like TSMC. Intel is an integrated device manufacturer (IDM) that produces most of its chips at its own foundries.

Qualcomm also generates most of its profits from its higher-margin licensing business, which leverages its massive wireless patent portfolio to squeeze royalties and license fees from every smartphone sold worldwide (including those that don’t use SoC- the Qualcomm phones). That’s why Qualcomm consistently generates much higher operating margins than Intel.

But if Qualcomm buys Intel in its current form, it would inherit its capital-intensive foundry business, which lags far behind TSMC and Samsung in the “process race” to produce smaller, denser and more energy-efficient chips. energetic view. Qualcomm should also probably start making its own chips at those struggling factories instead of outsourcing them to other foundries.

So it doesn’t make sense for Qualcomm to crush its own operating margins by absorbing Intel’s slower-growing and less profitable foundries. A takeover could be useful if Intel divests the foundry unit or eventually sells itself off, but this messy process would likely draw a lot of attention from antitrust regulators.

3. They would not complete their long-term strategies

Qualcomm still generates more than three-quarters of its revenue from making smartphone chips, but that market is saturated, maturing and highly cyclical. So to reduce its long-term reliance on smartphones, Qualcomm has been expanding its smaller automotive chip and Internet of Things (IoT) divisions. That’s why it tried to acquire the auto chip giant NXP Semiconductors six years ago.

Qualcomm’s takeover of NXP was never approved, but it would make much more sense for the chipmaker to make a new bid for NXP instead of Intel. Intel actually shut down its wearables group in 2018, scaled back its other IoT efforts, and spun off its automotive division Mobileye in an IPO in 2022. In other words, buying Intel would not significantly complement Qualcomm’s expansion of its automotive and IoT businesses.

4. The price is too high

Intel still has an enterprise value of $124 billion. Even with a conservative 20% acquisition premium, Intel would be worth nearly $150 billion. Qualcomm ended its most recent quarter with $13 billion in cash, cash equivalents and marketable securities. It also carried long-term debt of $13 billion, with a debt-to-equity ratio of 1.1.

Therefore, Qualcomm should finance most of this acquisition with its own shares. It has an enterprise value of nearly $190 billion with 1.1 billion shares outstanding, but more than 80% of those shares are already owned by institutional investors.

So to finance a takeover of Intel, Qualcomm would have to issue a lot more stock — but that would undo billions of dollars in buybacks in recent years. It would also weaken its own balance sheet by inheriting Intel’s $48 billion in debt.

Intel investors shouldn’t bet on a takeover

I doubt Qualcomm wants to buy Intel and limit its own growth, crush its margins and destroy its balance sheet. So instead of wondering if Intel will ever be saved by a buyout, investors should focus on the most likely scenario in which it shrinks or discontinues its business. If it manages to size right and shift gears, it could become a worthy investment again.