Nvidia's $5B Stake Fails to Mask Intel Foundry Woes: Is a Spin-Off the Only Way Out?

TradingKey - Thursday, chip giant Nvidia announced a $5 billion investment in rival Intel, acquiring approximately 4% equity stake in the company, sending Intel's stock soaring over 20% intraday.

Short-Term Boost Masks Structural Decline

However, this seemingly positive agreement deliberately sidesteps Intel's most pressing core issue — its deeply troubled chip foundry manufacturing business (IFS). This business, ambitiously launched by former CEO Pat Gelsinger in 2021 with plans to invest hundreds of billions of dollars in building factories for chip manufacturing, has struggled due to a lack of major customer commitments.

The business's losses have surged from $7 billion in fiscal 2023 to $13 billion in fiscal 2024, becoming a significant burden that has dragged down Intel's overall performance and is a primary reason for Gelsinger's departure at the end of last year, as well as the company's 60% stock price decline throughout the year.

Wall Street analysts are deeply concerned. "This is a business that will continue to bleed cash at least through 2027," CFRA analyst Angelo Zino said.

"The root cause of Intel's issue is its small scale, high cost, and poor execution of Intel Foundry," the Bernstein analysts wrote.

Compared to TSMC, which focuses solely on foundry services and has become the world's largest and most advanced chip manufacturer, Intel's strategy of bundling chip design with manufacturing has proven disadvantageous in today's industry trend toward specialized division of labor.

Notably, during Thursday's press conference, executives from both companies skillfully avoided the critical question of whether Nvidia products would actually be manufactured in Intel's factories. Huang Renxun vaguely stated that Nvidia "has been evaluating" Intel's foundry services and praised Intel's advanced chip packaging technology (potentially for new collaborative chips), but remained silent on the foundry business's prospects.

Huang even publicly praised TSMC — the current manufacturing powerhouse handling the vast majority of Nvidia's chip production — during the conference. Bernstein analysts stated that Nvidia has not yet provided a foundry agreement, which actually reflects Nvidia's strong preference for TSMC.

Spin-off: The Only "Lifeline" to Escape the Quagmire?

This deliberate avoidance actually reinforces an increasingly clear industry judgment: Intel's true path forward may lie in completely separating its chip design division from its loss-making manufacturing facilities.

Such a restructuring would offer multiple advantages: Intel's chip design division could more freely collaborate deeply with partners like Nvidia to develop products (such as data center and PC CPUs) without concerns about internal manufacturing conflicts of interest.

An independent foundry could eliminate concerns from potential customers like Qualcomm, AMD, and even Nvidia, making them more willing to place orders with a "pure-play foundry" that doesn't compete with them — precisely as Huang hinted, with Nvidia's current willingness to collaborate partly because Intel has lost competitiveness in the AI chip arena it once dominated.

An additional benefit of a spin-off is that investors could choose to invest in either Intel's chip manufacturing business or its chip design business based on their own preferences and strategic considerations, rather than being forced to invest in both simultaneously.

Considering recent government support for the industry (such as the CHIPS and Science Act), driven by concerns about U.S. domestic chip manufacturing capacity, this spin-off approach might better align with U.S. national security interests in enhancing domestic manufacturing and securing supply chain safety.

Early this year, Howard Lutnick, who had been nominated to become Commerce secretary, proposed spinning off Intel’s struggling manufacturing business, the people said. He planned to turn its operations over to Intel’s rival, Taiwan Semiconductor Manufacturing Company, and have Nvidia, Apple and other major chip buyers invest in the new company and have it make some of their semiconductors.

Of course, the path to a spin-off is fraught with obstacles. Ongoing massive losses at the foundry, complex financing arrangements, and technical challenges associated with separating from existing operations are all real hurdles.

“Intel isn’t out of the woods yet,” said Patrick Moorhead, founder of Moor Insights & Strategy, a tech research firm. “They have a lot to prove.”