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intel (INTC 0.04%) It just brought some notable artificial intelligence (AI) news to market and didn’t include new AI chips to keep up. Nvidia. Rather, the latest announcement includes Intel’s internally generated AI. software The business is now named Articul8 AI.
Backed by external investments from data centers, cell towers and internet infrastructure managers digital bridge grouplike any consortium of investment companies, Intel spun off Articul8 AI as a separate company.
Of course, Intel announced a number of new chips in December aimed at various AI applications. The company will also receive the first of a new batch of cutting-edge machinery from a top semiconductor manufacturing equipment company. ASML HoldingThis will be important for Intel’s new chip roadmap over the next few years.
But why separate the AI software business, especially when Nvidia, a leading AI training chip company, has a technological lead in hardware combinations? and software? And is Intel’s move to make Articul8 free a good investment heading into 2024?
Intel’s piggy bank strategy
Perhaps Intel’s release of Articul8 AI sounds familiar. In recent years, under the leadership of Chief Executive Officer Pat Gelsinger, Intel has been closing down non-strategic business areas and selling stakes in others to outside investors.
For example, in late 2022, Intel sold a small stake in its self-driving car chip segment. mobile eyeIt was relisted on a public exchange after Mobileye acquired a stake in early 2018. It currently holds majority ownership in Mobileye.
The same was achieved in the summer of 2023 with the sale of another subsidiary business, IMS Nanofabrication. IMS manufactures the equipment used to manufacture key components (called photomasks) used in advanced ASML lithography machines (more on this later). Intel sold a 20% stake in IMS to private equity firm Bain Capital, and a few months later sold another 10% of IMS to a fellow chipmaker. taiwan semiconductor manufacturing (or simply TSMC), which major chipmaker Intel is trying to corner.
Just recently, Intel announced that it would spin off its programmable chip business within the next few years. This programmable chip unit specializes in a semiconductor type called FPGA and was assembled primarily through his 2015 mega acquisition of Altera.
Breaking up Intel, or worse?
It’s clear that Gelsinger and Inter’s top team want to raise money. But this isn’t just about dismantling the Intel semiconductor empire.Gelsinger has made it clear he wants to get Intel back into chips. manufacturing industry Great. TSMC overtook Intel’s chip manufacturing technology capabilities a few years ago and quickly surpassed Intel in overall revenue.
Data by YCharts.
The problem, in the eyes of many inside and outside the semiconductor industry, is that China’s move to unify the island of Taiwan and other regions poses supply chain and geopolitical risks for TSMC. Intel sees an opportunity to position its vast manufacturing capacity, previously reserved for its own chip designs, as a third-party contract manufacturer alternative to TSMC.
A long list of fabless (no chip manufacturing, just engineering) semiconductor companies, including Nvidia, could be interested in diversifying their chip supply chains if Intel is available.
But there’s a problem. Intel cannot simply decide to compete with TSMC’s manufacturing capabilities. What you need is purchase That ability. That’s where ASML’s lithography equipment and other chip manufacturing equipment suppliers come into play. And ASML’s latest and greatest high NA EUV lithography equipment doesn’t come cheap.These amazing industrial technologies will cost him more than $400 million Eachplus significant ongoing operating costs.
Suffice it to say, if Intel wants to wrest back the chipmaking technology crown from TSMC, it will need a lot of cash it doesn’t currently have in its balance. As I wrote in November, Intel’s free cash flow will be significantly negative in 2023, leaving it with far more debt than cash balances.
Data by YCharts.
And what is it confronting? TSMC, which is highly profitable, maintain Demonstrate leadership in chip manufacturing. Therefore, Inter has a long way to go to close the gap.
Data by YCharts.
Bringing the AI software story full circle
And this is likely why Intel announced a new spin-off of one of its non-core assets, Articul8 AI. Intel will retain some ownership of the now independent software company and will support the emerging generative AI industry’s go-to-market strategy. But on the other hand, Intel also raised some cash for a manufacturing process that is sure to be expensive over the next few years.
So is this recent sale a buy for Intel? Probably for the right investors. Just be aware of the risks. With all of these divestitures to outside investors, Intel is setting up a steady stream of liquidity that it can tap into over the next few years. Now, it’s just a matter of whether Intel can do it, which will be difficult given the ever-increasing complexity of manufacturing next-generation chips.
At this point, I still only consider Intel as a riskier, potentially higher reward semiconductor recovery story. There are other chip stocks out there with better risk-reward profiles right now.
Nicholas Rossolillo and his clients hold positions at ASML and Nvidia. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and Mobileye Global and recommends the following options: A long January 2023 $57.50 call on Intel, a long January 2025 $45 call on Intel, and a short February 2024 $47 call on Intel. The Motley Fool has a disclosure policy.
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