President Trump announced in late August that the U.S. government is taking a 10% ownership in Intel Corporation (INTC), converting $8.9 billion in grants from the CHIPS Act into a cash infusion into the company, “reflecting the confidence the Administration has in Intel to advance key national priorities and the critically important role the company plays in expanding the domestic semiconductor industry.”
Additionally, the agreement includes a five-year warrant that allows the government to take an additional 5% of Intel at $20 a share if it ceases to own 51% of its foundry business (currently operating at a loss, but whose goal is to manufacture chips for third-party clients).
Hmm. Why does the government want to do this?
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Don’t get me wrong; it’s not like the U.S. has never taken positions in private companies, but they are usually in the form of:
- Direct equity stakes, such as in the 2008 subprime meltdowns.
- Venture capital-like programs supporting new technologies, like Advanced Research Projects Agency–Energy (ARPA-E), to fund advanced energy ideas.
- Subsidies for essential infrastructure, such as the transcontinental railroad.
- Grants or tax credits (like R&D) to foster specific industries, including the CHIPS Act, which authorized $280 billion in funding for semiconductor manufacturing in the U.S.
- Loan Guarantees to provide guarantees to private entities, so that critical businesses can access capital.
But … the reasons for those intrusions into non-government entities have historically been due to economic catastrophes that threatened to cause the collapse of the stock market, certain industries, and trigger a recession, or worse, as well as economic and business stimulus. Those instances include:
- The Small Business Investment Act of 1958 established the Small Business Administration (SBA).
- During the Civil War, the U.S. invested in the transcontinental railroad, which spurred economic growth and communication.
- With the Troubled Asset Relief Program (TARP) in 2008, seeking to stabilize the financial system, the U.S. became a major shareholder in some of our largest financial and auto companies, like AIG, Citigroup, and General Motors, to the tune of $700 billion and more than $17 billion, respectively.
- Looking to foster technological innovation, the CHIPS Act was created in 2022.
Trump says his reason for the investment is that “He’d like to increase chip production in the U.S. and reduce the nation’s dependence on chips manufactured overseas. He believes that the investment in Intel will help the U.S. to better position itself to maintain its technological edge over China in the artificial intelligence race.”
As I mentioned earlier, through the CHIPS Act, we’ve already invested in Intel, and as it’s becoming pretty clear that the company was not going to make the construction milestones required to receive the grants, this conversion from grants to cash ensures that Intel will get the money. And Trump says, “The U.S. government is owed a return on their investment.”
3 Concerning Issues with the U.S. Position in Intel
Okay, I can buy that, but there are three particular issues with this agreement that concern me:
- Kevin Hassett, director of the White House National Economic Council, told CNBC “That although Intel is a “very, very special” circumstance, that “there’ll be more transactions, if not in this industry, then other industries.” Really. Are we going to be like China or Russia, supposedly “investing” in private companies that we intend to actually nationalize at some point? Is this initiative undermining free enterprise, as we know it?
Trump was also quoted as saying, “The direct government stake could also incentivize potential customers to view Intel on a different level.” I’m not sure what that means exactly, but I can just envision the government’s next step is to tell investors to look at Intel the same way.
So now, is the U.S. government going to give me investment recommendations? And are we inviting private enterprises to cozy up to the government so they can get bailout money, too? If a company is not viable on its own, what does that mean for investors and analysts who are trying to determine if the company is a valid investment candidate?
- Is the government now an owner and a regulator of the business? Think about that; it seems to me that just might be a conflict of interest down the road.
One last, but major, concern is that the foundry that Trump wants to use our hard-earned money for has been a money loser, shedding $13 billion last year. The bleeding has been so bad that shareholders, industry analysts, and Intel’s former board members have been calling on the company to sell it. In fact, at the end of last year, the board forced out CEO Pat Gelsinger, who was the original architect of its “ambitious foundry strategy,” which inspired rumors of Intel selling it off.
As to the entire company, Intel has been struggling for years, after being the “King” in the 1990s and early 2000s. The company lost nearly $19 billion last year and another $3.7 billion in the first half of this year, resulting in a planned 25% cut in its employee ranks. Competition from the likes of Nvidia (NVDA) and Advanced Micro Devices (AMD) has cut into its once-leading market share, and the company’s decision to all but ignore the developing mobile computing business after the iPhone’s debut has increased its suffering.
Many industry pundits believe the president’s investment is interfering with the natural progression of capitalism and aims to put Intel back into competition.
Where’s the Money Going?
Intel says, “It’s planning to use the money to expand its chip-making capacity by modernizing and increasing the size of U.S. sites in Arizona and elsewhere.” We’ll see.
Should You Buy Intel Stock?
The following chart shows you the progress of Intel’s stock since inception.
As you can see, it’s been on a downward trend since 2020.
Right now, analysts have a price target of around $22, a couple of bucks shy of where the stock is currently trading. And 38 of its 44 analysts have the shares on HOLD.
I’m siding with them. I think we need to see how this infusion of government funds is going to work. If you’re currently a shareholder, I wouldn’t panic. You’ll probably be okay, but you might also want to consider a competitive stock that may hold more potential, like AMD or NVDA.
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