Intel’s main issue isn’t being resolved by Nvidia’s $5 billion investment.

Nvidia Invests $5 Billion in Intel, but Challenges Remain

Investors have expressed optimism over Nvidia’s (NVDA) recent announcement regarding its $5 billion acquisition of Intel (INTC), leading to a 30% rise in Intel’s stock on Thursday. Yet, this investment may not address Intel’s core issues.

As part of this transaction, Nvidia will secure a 4% stake in Intel, allowing it to utilize Intel’s CPUs in AI data center server systems. In exchange, Intel will integrate Nvidia’s AI technologies into its semiconductor products for personal computers.

However, the deal notably omits discussions around Intel’s manufacturing operations and the Intel Foundry Services division, which have drawn considerable investor attention due to significant losses, particularly in the context of AI’s disruptive impact on the chip market.

Intel has a long history of manufacturing its semiconductors but expanded its operations to external clients in 2021. This shift, driven by former CEO Pat Gelsinger’s vision, aimed to revitalize the company as it faced increasing competition. But achieving these goals required considerable investment in new factories for chip production.

Despite Gelsinger’s ambitious plans, the lack of strong customer commitments has resulted in escalating losses for Intel Foundry Services, which rose from $7 billion in 2023 to $13 billion. These financial challenges contributed to a significant decline in Intel’s stock, losing around 60% of its value last year. Gelsinger was let go by the board in December.

Analysts on Wall Street are concerned that Intel’s foundry business could remain a major liability. Some suggest selling it off, while others caution that such a move could make chip manufacturing less cost-effective.

CFRA analyst Angelo Gino remarked, “This is a business that keeps cash bleeding until at least 2027.”

In a press conference discussing the acquisition, the CEOs of Intel and Nvidia indicated that Nvidia might eventually become a customer of Intel Foundry Services. However, they acknowledged that for the time being, their companies will continue to collaborate with Intel’s competitor, TSMC (TSM).

Meanwhile, the U.S. government has a vested interest in Intel’s manufacturing success, given that it is the sole large-scale chip maker within the country capable of producing semiconductors for the Department of Defense. In contrast, the majority of advanced chip production is handled by TSMC in Taiwan.

TSMC is expanding its manufacturing presence in the U.S., but most of its operations and key research and development remain in Taiwan. Given the risks associated with potential geopolitical conflicts involving Taiwan, experts have emphasized that the longevity of Intel’s manufacturing capabilities is crucial for national security.

Moor Insights & Strategy Analyst Anshel Sag expressed surprise that Thursday’s deal did not include elements that would benefit Intel Foundry Services. He had hoped Nvidia would announce some sort of contract manufacturing agreement, especially given the U.S. government’s recent acquisition of a 10% stake in Intel.

While Nvidia and Intel’s recent agreement focuses on the latter’s product division, Zino noted that it could enhance the reliability of chipmakers that are friendly to manufacturing.