Investors ignore red flags as Intel surges on share diluting $18 billion stake deals

Intel’s stock has pulled off one of the most counterintuitive rallies in recent Wall Street history. The chipmaker’s stock has surged nearly 90% since early August, according to Bloomberg, after sealing $18 billion worth of stake sales to the U.S. government, SoftBank Group, and Nvidia.

The company, still losing money, is using these deals to refill its cash reserves and fund its transformation into a major chip manufacturer for others. The logic behind this rally goes against traditional market sense, because selling new shares typically means dilution, shrinking the value of existing stockholders’ stakes.

Bloomberg estimates that Intel’s shareholders have been diluted by about 14%, and predicts that it would likely only increase when the U.S. government’s warrants are exercised under certain terms.

But the market doesn’t seem to care. Investors appear to value liquidity and survival more than share size right now. Michael Bailey, research director at Fulton Breakefield Broenniman, said:

“Investors are front-loading all this good news and really diminishing the real cost — with all of these stake sales there’s massive dilution. It’s a plus and minus situation. Investors are betting that the plus is better than the minus.”

Intel secures breathing room while chasing manufacturing revival

This surge of optimism comes as Intel faces massive spending requirements. The company is in the middle of a costly buildout of factories aimed at reviving its position as a foundry rival to Taiwan Semiconductor Manufacturing Co. (TSMC).

The $18 billion raised so far only covers a little over half of the $30 billion needed to build its next-generation plant. That shortfall pushed the company to approach Apple late last month about potential investment, a move that sent Intel shares up another 21% in three sessions.

The balance-sheet boost is giving Intel some temporary relief, even as investors overlook the downside of share dilution. Analysts say this could be short-lived unless the foundry business attracts clients.

Frank Lee from HSBC cut Intel’s rating to sell, warning that “any rallies driven by stake sales are not sustainable” until customer demand materializes. Still, for now, traders are betting that the infusion of capital buys Intel enough time to execute its turnaround.

The approach mirrors AMD’s recent actions. On October 6, AMD signed a major deal with OpenAI that could bring in tens of billions of dollars over time.

In exchange, OpenAI received equity warrants that vest if specific goals are met. The market’s reaction was wild, with AMD shares surging by literally 43% in three trading sessions despite the obvious future dilution.

Like Intel, AMD’s investors are ignoring the math in favor of optimism around the AI mania.

Analysts warn of risk as AI-era financing blurs lines

Jay Goldberg from Seaport Global described Intel’s situation, asking: “Would you rather have 80% or 70% of something, or 100% of nothing?” Jay upgraded his rating on the stock from sell to neutral, saying investors prefer a smaller piece of a viable company over watching it crumble.

AMD, meanwhile, is in a stronger financial spot, as its net income tripled to $872 million last quarter, and revenue rose 32% to $7.7 billion, as Cryptopolitan reported.

Yet, despite those numbers, AMD still commands only a small portion of the AI GPU market dominated by Nvidia, so its deal with OpenAI was designed to change that.

Under the terms, OpenAI can buy up to 160 million AMD shares, about 10% of the company, at one cent per share, if the stock and performance milestones are achieved. The final vesting condition triggers at $600 a share, a level that would make AMD a $1 trillion company.

The wider AI ecosystem is also spinning in a loop of cross-investments. Nvidia recently pledged up to $100 billion for OpenAI’s expanding network of data centers filled with its own chips, while OpenAI itself remains unprofitable.

Bailey called this “an unusual circular financing thing happening,” where companies “find creative ways to grow.” He added, “Investors are doing the math and for the moment they’re comfortable with it. But if you look at the history of Wall Street, this is unusual.”

If you're reading this, you’re already ahead. Stay there with our newsletter.