Qualcomm Targets Intel, But Nvidia Is The Better Fit

Mobile chipset specialist Qualcomm (NASDAQ:QCOM) has approached Intel (NASDAQ:INTC) regarding a potential takeover, according to a report in The Wall Street Journal. Intel makes for an attractive acquisition target at this juncture. Intel stock has fallen over 55% this year and nearly 70% from its 2021 highs, amid market share losses in both the PC and server space to AMD and multiple manufacturing-related missteps. Intel’s market cap stands at just about $90 billion. However, Intel is showing signs of recovery after years of heavy investments into production capacity and improving process technologies. The foundry business recently secured a manufacturing contract to design and produce custom AI chipsets for Amazon’s AWS, while receiving grants from the Pentagon to manufacture chips for the U.S. military. Intel’s next wave of PC and data center CPUs and accelerated computing processors also appear relatively compelling. Intel is getting much more serious about its cost cuts, aiming to slash costs by as much as $10 billion by next year. That being said, we aren’t sure if Qualcomm is the best suitor for the storied chipmaker. Why not artificial intelligence titan Nvidia? To be sure, there have been no reports about Nvidia (NASDAQ:NVDA) being interested in Intel, but we believe it would be the better bet for Intel and its shareholders.

Now the decrease in INTC stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

While details of Qualcomm’s proposal and strategy regarding approaching Intel remain scarce, Qualcomm could be considering the deal to offer a wider range of chips, getting into the server market, while enabling it to establish a better hold in the PC market, beyond the recent launch of its Snapdragon X PC chip. Moreover, Intel’s manufacturing facilities could also be of interest to Qualcomm which has engaged with Intel in the past to potentially make its chips. Although Intel recently indicated that it would spin off its foundry operations into a separate subsidiary with an independent board, there could be some upside for a fabless manufacturer such as Qualcomm. While Qualcomm has a strong balance sheet, it doesn’t appear to be large enough to digest Intel. With about $8 billion in cash and a market cap in the range of $180 billion, the company will likely be eyeing a stock deal to acquire Intel, which has a market cap of $93 billion.  Qualcomm may also need to sell off some of Intel’s assets to make the acquisition viable from both a financial and regulatory standpoint.

Overall, we believe that Nvidia is potentially better positioned to leverage Intel’s assets for future growth.  Nvidia has much deeper pockets and more resources to invest in Intel’s turnaround efforts and future growth, given its much larger market cap of over $2.8 trillion, with a more sizable cash holding of close to $35 billion as of the most recent quarter.  Besides the stronger balance sheet, there are also a couple of other factors that make Nvidia a better suitor. Nvidia already holds a significant presence in key markets where Intel competes, serving as a leading supplier of GPUs for PCs and accelerated computing chips for servers – two areas where Intel’s CPU business is also deeply entrenched. This could enable Nvidia to sell a broader range of products to existing customers. Given that Intel has also been pushing into the GPU space, with its Gaudi 3 chips, Nvidia could potentially eliminate a competitor as well via a deal. While Nvidia has emerged the face of the AI hardware revolution, this data center company has been growing its sales even faster than Nvidia and trades at a more attractive multiple.

Intel’s foundries could be valuable to Nvidia, which currently relies heavily on third-party foundries such as TSMC to produce its silicon. Admittedly, Intel has lagged behind TSMC in recent years in terms of technology. However, it has made considerable progress lately. For perspective, Intel’s latest manufacturing technology, called 18A, delivers a sub-2-nanometer process node, with volume production expected by the end of 2024 – roughly a year ahead of TSMC’s anticipated 2-nanometer process, N2P. This could potentially benefit Nvidia down the line, given its cutting-edge GPU designs. Beyond possibly lowering production costs, a deal with Intel could also secure supply chain stability. Why? TSMC, which handles nearly all of Nvidia’s high-end GPU fabrication, is based in Taiwan, making production vulnerable to geopolitical tensions with China. Intel, with its U.S.-based manufacturing, would mitigate that risk to a large extent. Granted, Nvidia could utilize Intel’s foundry services without buying the company, but at current valuations, an outright acquisition might make more sense.

Overall, while we think Nvidia would be a better bet, there’s no guarantee that Intel and its shareholders will want to be acquired at this point.  With so many new developments underway Intel stock could have considerable upside. If the company executes well on its foundry plans and delivers compelling new CPU and GPU chips, Intel could see almost 3x upside. On the other hand, if it fails to execute, Intel stock could see a downside to $10

While investors have their fingers crossed for a soft landing for the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/23/2024
[2] Cumulative total returns since the end of 2016

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