To The Moon

The chip industry was abuzz on Friday after reports surfaced that Qualcomm ( $Qualcomm(QCOM)$ ) had approached Intel ( $Intel(INTC)$ ) with a potential acquisition offer, valuing the latter at roughly $90 billion. While the details of this proposal remain unclear, the market responded with mixed signals: Intel shares jumped 3%, while Qualcomm’s stock dipped 3%. Let's explore whether this acquisition could be a strategic win or a financial risk while assessing the potential impact on Intel’s stock price, which I still target at $25.

The Strategic Rationale Behind Qualcomm’s Move

Qualcomm’s interest in Intel, though surprising, is not completely out of left field. Qualcomm is predominantly seen as a mobile chip giant, with about 70% of its revenue tied to mobile devices. Intel, on the other hand, holds strong positions in the PC and server processor markets, which Qualcomm has yet to penetrate. The acquisition could instantly give Qualcomm a dominant position in these new segments, reshaping the company into a broader technology leader and allowing it to diversify its revenue streams.

For Intel, which has been struggling with profitability and manufacturing challenges, this acquisition could offer a lifeline. Recent announcements from Intel about its upcoming 18A chip technology have given the market hope, but serious operational and financial hurdles remain. Qualcomm’s higher-margin products could offer Intel a financial buffer, allowing it to focus on fixing its core manufacturing issues.

Challenges and Risks in the Acquisition

Despite the potential synergies, a Qualcomm-Intel merger faces substantial roadblocks. Financially, the deal is daunting. Qualcomm has only $13 billion in cash and equivalent assets, which pales in comparison to Intel’s $87 billion market cap. Even with a stock-based deal, Qualcomm would need to raise significant debt, burdening both companies with high financial risk. Intel itself is saddled with $19 billion in long-term debt, making the combined entity's debt load an immediate concern.

Further complicating matters is the disparity in profitability between the two companies. Intel’s gross profit margin of 35% is significantly lower than Qualcomm’s 76%. Intel’s operational inefficiencies would dilute Qualcomm’s profitability right from the start, raising doubts about whether the deal would create value for Qualcomm’s shareholders. Indeed, the 3% drop in Qualcomm’s stock reflects investor scepticism about whether this move is worth the risk.

Antitrust Hurdles and National Security Concerns

A major hurdle to this deal’s success is regulatory approval. Intel holds a unique position as a “son of the family” in the U.S. semiconductor industry, with close ties to national security interests, particularly in chip manufacturing. A Qualcomm takeover would likely undergo intense antitrust scrutiny, especially in an era where the U.S. is emphasizing domestic chip production. The deal could be perceived as concentrating too much power in one company, raising questions about competitive practices and the future of U.S. technological independence.

Additionally, Qualcomm’s reliance on third-party manufacturers like Taiwan Semiconductor ( $Taiwan Semiconductor Manufacturing(TSM)$ ) could be a liability. With Intel set to receive billions from the CHIPS Act to build domestic factories, any attempt by Qualcomm to absorb Intel could face political and regulatory pushback, delaying or even derailing the acquisition.

The Bigger Picture: Intel’s Long-Term Outlook

Even if the acquisition were to succeed, Intel’s fundamental issues remain unresolved. The company is still grappling with a cash flow shortage and faces profitability challenges. Although Qualcomm might help boost Intel’s financial profile in the short term, it is unclear whether this would be enough to address Intel’s deeper structural problems, particularly in manufacturing.

In my view, Intel’s stock remains undervalued, currently trading near $21, which I believe is at the bottom. The potential acquisition news has temporarily buoyed Intel’s price, but I maintain my target price of $25. This is based on the belief that Intel’s long-term prospects, particularly with its CHIPS Act funding and chip innovations, provide a strong foundation for recovery, even if the Qualcomm deal falls through.

Conclusion

The proposed Qualcomm acquisition of Intel offers both promise and peril. Qualcomm could immediately diversify its product offerings, but at a significant financial cost and the risk of diluting its profitability. Intel, while benefiting from an immediate stock price boost, still faces long-term challenges that a merger may not fully resolve. For now, the market is in a wait-and-see mode, and while I remain optimistic about Intel’s future, this acquisition should be viewed cautiously.

@TigerWire