Intel’s Trump deal just one more reason to sell, analyst says
Intel shares have risen thanks to Donald Trump’s deal getting the US government a 10 per cent stake in the chip maker. Not many analysts seem to agree it will help for long.
Former US president Ronald Reagan once famously described the nine most terrifying words in the English language as: “I’m from the government, and I’m here to help.” Intel chief executive Lip-Bu Tan might be inclined to agree.
Having been summoned to the White House this month following an accusation from Senator Tom Cotton that tied him to state-owned business in China, Mr Tan has wound up having ceded nearly 10 per cent of the chip maker to the US government.
President Donald Trump was in a mood to celebrate, saying he “paid nothing” for the shares and promising the stake would be “a great deal for America and, also, a great deal for Intel”. Although the stock has risen, not many analysts seem to agree it will help for long.
Jay Goldberg, a senior analyst at Seaport Research Partners, thinks the deal – which converts around $US9bn ($13.8bn) in funds earmarked under president Joe Biden’s Chips and Science Act program into a 9 per cent equity stake – still leaves Intel with a host of challenges. He rates Intel stock at Sell, with a target of $US18 for the price, some 27 per cent below where the shares closed on Friday.
“The stake in Intel does nothing to shore up the company’s funding needs, except for the possible signal it sends to commercial entities to follow suit and actually invest in the company,” he said in a note.
Mr Goldberg thinks Intel needs at least another $US20bn to shore up its 14A process, a next-generation technology it hopes will justify its chip-manufacturing expansion. Without that cash, he argues, “the company’s future in semis manufacturing essentially comes to an end”. He also points to a number of questions, most of which remain unanswered, in the unorthodox arrangement.
“There is no clear legal mechanism for this exchange, and so could theoretically require congressional approval,” he said. “The government is not pledging to support Intel in any other way (beyond unlocking the Chips Act money) and governance remains highly uncertain” now that the President has said he “controls” Intel.
All that said, Intel stock has risen more than 18 per cent since Mr Tan met with Mr Trump at the White House on August 11. It has gained nearly 24 per cent since the start of the month.
But Intel also told investors, through a Securities and Exchange Commission filing, that the new stake will dilute existing shareholders. If the government also converts the warrants it purchased, which are linked to the ownership of Intel’s foundry business, they could be diluted even more.
Mr Goldberg thinks the most likely benefit from the stake is that it could encourage other companies to invest in Intel, with the aim of accelerating its domestic chip production, which has already been delayed to around 2031.
But that, he argues, “leaves investors in a precarious limbo”. “On the one hand, news of outside investment will be seen as a strong positive for the stock,” he said. “But on the other hand, once the glow of those investments fades, the company’s commercial prospects remain highly challenged.”
Reagan’s famous description of government intervention was, ironically, made during a speech that defended a Republican effort to provide price and income protection during the farm crisis of the 1980s. Mr Trump might not be facing trouble on that scale, given big tech’s grip on both the market and the global economy, but his move to establish domestic control over the semiconductor industry is equally significant.
That doesn’t mean it’s going to work.
“The US government does not have a great track record when it comes to investing in companies,” Mr Goldberg said. “We will leave it at that.”
Barron’s
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