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Intel (INTC -1%) edges lower today after Bloomberg reported that the Pentagon will pull out of its plans to spend up to $2.5 bln on a chip grant to the U.S.-based semiconductor manufacturer. Just last week, reports swirled that INTC was poised to grab a $3.5 bln contract to produce advance chips for the U.S. military, news which helped push shares over +3% higher the following day. As such, Bloomberg's article yesterday after the close is meaningful since, because the U.S. Commerce Department is expected to make up for the shortfall, the total dollar amount investors expected INTC to receive in federal funding could be lower.

However, it is not concrete that the total funds INTC will receive will be $2.5 bln less. Before the news broke, the Commerce Department had previously been responsible for just $1.0 bln of the funds. Now, because the Commerce Department must make up the difference, uncertainty has been injected into INTC shares, driving today's moderate pullback.

Nevertheless, even though Bloomberg's report does not strike us as overly alarming, INTC is facing plenty of hurdles on its road to recovery after a tumultuous inventory glut in 2022, which is still ongoing, that sent shares plummeting to levels not seen since 2015. The stock still trades roughly 35% below 2021 highs.

• Compared to the world's largest chip maker, Taiwan Semi (TSM), INTC remains technologically disadvantaged, leaving considerable growth on the table as TSM benefits from outsized demand from AI leaders NVIDIA (NVDA) and Advanced Micro (AMD).
• Meanwhile, INTC's Data Center and AI (DCAI) segment endured declining revenue growth during its most recent quarter, a discouraging development for investors anticipating the company to start to make inroads competitively with NVDA and AMD.
• If INTC's technologies reach parity or come close to TSM, big tech firms have already transitioned from INTC, making it a more challenging path toward recapturing market share from TSM. For instance, Apple (AAPL) ditched Intel chips for its Macs around four years ago, designing its own chips in-house on TSM's technology. Given the performance improvements AAPL enjoyed from the transition, it appears doubtful they would resign a deal with INTC.
• Sales to China, which comprises over a quarter of INTC's total revenue, could come under regulatory pressures. NVDA and AMD have already halted sales of some of its chips to China due to export curbs; INTC could be next.

Bottom line, while uncertainty surrounding whether INTC will receive the $2.5 bln expected from the Pentagon is stirring up some selling pressure today, the company is staring at much more substantial headwinds over the near term as it continues dealing with ongoing inventory adjustments, competitors cementing leadership positions in AI, and potential regulatory setbacks.