Story Stocks^®

There has been no shortage of headlines involving Intel (INTC -6%) following the chip maker's discouraging Q2 earnings report last month. Since the dismal performance, which included a top and bottom-line miss, gloomy Q3 guidance, and a massive restructuring plan, including a 15% reduction of its workforce, reports have surfaced involving potential activist pressures and the possibility that INTC could seek a buyer for its Foundry business.

Over the weekend, the New York Post reported that INTC's CEO Pat Gelsinger will present the company's cost-cutting plan to the board later this month. The plan does not include INTC divesting its Foundry operations, reports of which ignited buying interest last week. As such, investors are expressing disappointment today. However, like we mentioned last week, it would be surprising to see INTC sell off its Foundry business despite it recording a $2.8 bln operating loss in Q2, given how much time and money has been poured into this segment, let alone the unit's differentiating factor from pure chip designers like Advanced Micro (AMD) and NVIDIA (NVDA), which rely on Taiwan Semi (TSM) to produce their chips.

Instead, the cost-cutting plan reportedly surrounds other actions to better survive the hardships that have stunted revenue growth and produced hefty losses, from high failure rates of 13th and 14th-generation CPUs to competitive disadvantages within the AI space.

• To avoid selling its Foundry business, INTC could sell its many non-core assets. Its more cyclical businesses of NEX, which includes Network Platforms, IoT, and Connectivity, Altera, and Mobileye, have struggled lately, dampening margins in Q2 and underperforming initial forecasts heading into Q3. Altera is already on track for full operational separation by the end of the year. INTC is also working on a path to an IPO over the coming years, making it more likely that this business could be on the chopping block.
• Throttling factory expansion efforts is another option to reign in spending. Earlier this year, INTC's Ohio plants were delayed by an additional two years, extending production until no earlier than 2027. INTC has plans to invest over $28 bln in its Ohio plants over the course of construction. Meanwhile, INTC announced an over €30 bln investment to construct fabs in Europe, with new locations in Germany -- which has also been delayed -- and Poland. Pausing these plans, particularly since they have already been extended, is becoming more likely.

Given the high costs associated with INTC's several moving pieces, from expanding production capacity to R&D efforts to better catch the sizeable lead AMD has already established in AI, INTC must act swiftly to avoid worst-case scenarios, such as having no other option other than to offload its Foundry business or an activist investor stepping in and enacting sweeping changes. While a rapid turnaround seems unlikely at this point, INTC is not entirely out of the AI race, nor has it lost the ability to re-establish itself as a chip-making behemoth worthy of lucrative orders from big tech firms. Still, any setbacks at this point could lead to further deterioration in INTC's quarterly numbers.