Does the Ten Percent US Government Stake in Intel Help or Hurt It as an Investment?
The United States government now has a ten percent stake in Intel, the company that designs, manufactures and sells computer chip and central processing cores. It provides microprocessors for most computer manufacturers. It is a granddaddy in the world of micro processing having been founded in 1968 by, among others, the coinventor of the integrated circuit, Robert Noyce.
The Decline and Hopeful Recovery of Intel
The granddaddy of computer chips once dominated their business and investing niche but lost their leads in technology and profitability over the years to the likes of Taiwan Semiconductor and, more recently Nvidia. Nevertheless, Intel was a major beneficiary of the Chips and Science Act receiving nearly $8 billion in direct funding to enable it to build new facilities in Oregon, Ohio, New Mexico and Arizona. The goal of the Chips and Science Act passed with support from both parties was to revitalize the US semiconductor industry and bring more production back to the US. Part of this happened because of the wakeup call of the Covid Pandemic when the US realized how grossly dependent it had become on foreign supplies for both high tech and basic items.
What is the Ten Percent US Stake in Intel?
This happened when President Trump flat out asked the head of Intel for a ten percent stake in the company for the US and he got it. We have to assume the company believes that they will get favorable or preferential treatment on government contracts. The stake means that the US will have seats of the company board of directors. Despite what could be a favorable situation for the company it has warned that there might be “adverse reactions” from employers as well as investors because of Trump’s involvement according to MSNBC. What this means for your investment in Intel is not immediately clear.
Will Giving the US a Ten Percent Stake in the Company Help or Hurt Intel?
Despite the interest in bringing Intel back into prominence bringing chip manufacturing back to the US, three fours of Intel’s sales come from outside of the USA. The US constantly complains about Chinese government involvement with their tech companies. Now the same might be said about the USA and Intel. Despite a fair amount of hand wringing, shares Intel went up by a quarter on the news. Total offshore sales for Intel are more than fifty billion a year. Meanwhile the US military accounts for pays for less then ten billion in microprocessors a year although that is expected to increase substantially over the next decade.
Investors Always Try to Predict the Future of Their Investments
We frequently write about how determining intrinsic value is a key to successful long term investment. In this regard, we can hope that Intel gets a steady and increasing stream of business from the US do to the ten percent deal. However, an issue is the world of Donald Trump is that you are never sure about what will come next. Additionally, this deal could end up hurting foreign sales for Intel more than it helps domestic sales. This makes it hard to determine forward looking earnings which are key to intrinsic value analysis.
What Is the Bottom Line for Intel?
During and after the Covid Pandemic and the realization that the US has been dangerously dependent on foreign supplies for basic and critical items, a consensus has developed among those who make decisions in Washington among the defense and intelligence establishments as well as in both political parties. There is probably no going back on decisions to support and promote local companies and trying to force foreign companies to start producing in the USA. If that turns out to be the case Intel is likely to benefit from sets of long term contracts both in industry and the US military. With the semiconductor business being too often a feast of famine world, anyone with an inside track on major, lucrative contracts will benefit. It appears to us that giving the US a ten percent stake could be a step by Intel toward creating such a situation.