uploads/2019/12/Graphics-29.jpg

Behind Intel Stock’s Decline after a Strong Rally

By

Updated

After rising 8% on October 25 on the back of strong third-quarter earnings, Intel (INTC) stock dipped 3.4% in the first two days of December. There were many factors at play that caused the dip. Among them was the completion of its sale of modem business to Apple (AAPL) for a “multi-billion dollar loss.” This is what Intel claims in a court filing, as reported by Reuters.

Another factor was media reports about Intel eyeing an over $1 billion acquisition of Israeli AI chip startup Habana Labs. However, the major factor that caused panic among Intel investors was the Bloomberg report that Amazon (AMZN) Web Services is exploring ARM-based server chips.

In this article, we’ll look at each of these three factors and understand their impact on Intel.

Intel stock falls as it sells smartphone modem business to Apple for a loss

As the former CFO Bob Swan took the CEO role in January, he aimed to restructure the company and focus on core technology. This put a sword in Intel’s smartphone modem and 3D NAND (negative AND) business. The only profitable client of Intel’s smartphone modem was Apple. But when Apple settled a two-year-long licensing dispute with Qualcomm (QCOM), producing the modem was no longer lucrative for Intel.

So, a few hours after the Qualcomm–Apple modem agreement announcement, Intel exited the 5G smartphone modem business. In July, Intel sold its 5G smartphone modem business to Apple for $1 billion. However, Intel retained modems for PCs, autonomous vehicles, IoT (Internet-of-Things), and smart home devices. According to recent media reports, Intel is looking for a buyer for its smart home modem business.

On November 29, Intel filed an amicus brief in the US Court of Appeals for the Ninth Circuit, supporting the US FTC (Federal Trade Commission) decision that finds Qualcomm guilty of an antitrust violation. In a blog post, Intel general counsel Steven Rodgers stated that Qualcomm’s anticompetitive licensing practices forced it out of business. He stated that Intel sold its 5G smartphone modem business to Apple for a loss. By this, he means the approximately $4 billion expense the company undertook for the research and development of mobile chips.

Rodgers wrote that Intel got the Apple contract after two acquisitions, millions in investments, and several product launches. But it could not withstand the wrath of Qualcomm’s low pricing and was forced out of the market. Intel’s filing sent Qualcomm’s stock down 3.6% in the first two days of December.

Intel’s connected home division is next

After the 5G smartphone modem chip business,  there are rumors around Intel’s connected home division. Bloomberg, citing sources with knowledge of the matter, reported that Intel is looking to sell this division. The division earns $450 million in annual revenue by supplying chips for home routers and gateways.

Intel is not only offloading non-core assets but is also reportedly acquiring core assets related to AI and autonomous vehicles.

Intel stock reacts to rumors around Habana Labs acquisition

Israeli publication Calcalist learned from sources familiar with the matter that Intel is looking to acquire Habana Labs and that the talks are in an advanced stage. According to the unnamed source, the deal could be valued at $1 billion–$2 billion, making it Intel’s second-largest acquisition in Israel after Mobileye.

Although both companies declined to comment on the rumor, it is possible that the rumor could be true. Firstly, Habana Labs, founded in 2016, has raised $120 million to date with Intel Capital leading its latest round of funding. This means that Intel already has an interest in Habana.

Secondly, Habana develops AI-specific processors like Goya for AI applications and Gaudi for AI training. Intel is firing on all cylinders to compete with Nvidia in AI. Thirdly, Intel already has operations in Israel through Mobileye. All these factors make Habana an ideal acquisition target of Intel.

Amazon unveils ARM-based server chip

Although Intel is looking to increase its share in the AI market, it is a leader in the server space. Many cloud companies are developing their own server chips. The latest in line is Amazon Web Services. AWS unveiled its ARM-based second-generation server chip, Graviton2, for general-purpose computing. This could pose competition to Intel and AMD server chips.

All these events sent Intel’s stock down over 3% in the first two days of December. However, we believe this is just noise, as the chip giant has strong growth opportunities.

More From Market Realist