Intel Is Still 'Too-Strategic-To-Fail'

Intel shares opened down 28% on Friday, reflecting a broader tech sector decline, short-term revenue guidance, and ongoing uncertainties about the company's AI growth and foundry business turnaround. Despite this market correction, Intel's third-quarter fundamentals remain strong, with improving product mixes and four consecutive quarters of beating earnings estimates. Foundry losses decreased, and artificial intelligence revenues grew. Intel represents a unique investment because it is too strategic to fail. As the only American company capable of high-end semiconductor fabrication, Intel has crucial national security and commercial backing from the U.S. government and major tech firms seeking an alternative to overseas suppliers.

Intel shares opened down 28% on Friday morning from Thursday's close. Efficient market theorists would argue that the market is never wrong. The company is simply worth $150 Bn less than it was the day before, and that's that. Behavioral finance types would point to the psychological dynamics of this shocking correction. They might well conclude that the market had over-reacted, and the shares are now mispriced. Or perhaps Intel was previously mispriced - overvalued - and this drop is the "reset" to the proper valuation.

Or - is it all just noise? Sound and fury - but signifying little? (At least for fundamental investors.)

There are two reasons to think so. First, the thunderclap struck the entire tech sector. In dollar terms, Nvidia's decline in market capitalization was more than twice that of Intel. Google's was three times more. Even SpaceX lost more than Intel. Intel's loss was greater on a percentage basis, but that may reflect more some additional uncertainty about the company's turnaround than the revaluation of the company's fundamentals.

And that's the second point: Intel's fundamentals - the important ones - haven't deteriorated. Quite the opposite. The operating results for the 3rd quarter are quite strong.

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The product mix is improving, with AI and Foundry revenues growing.

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The company actually beat Wall Street's earning estimates for Q3. Intel has beaten earnings estimates (for normalized EPS) four quarters in a row.

[A Technical Note: Normalized EPS is becoming a preferred metric for analysts, which removes the effects of interest, taxes and unusual one-time items from the GAAP approved figure. Intel also has a unique and rather strange complication. The company has sustained a very large (though unrealized) "loss" on the value of shares held in escrow for the government in connection with the investment last year by the Dept of Commerce. This loss comes about, bizarrely, from success. As Intel's business improved and the share price increased over the past year, the value of the shares held in escrow increased - in effect, the value of what the company owes the government became higher, which is accounted for as a charge against GAAP earnings. Perversely, this means that as Intel does better and its shares go up, it incurs (huge) paper losses (~$12.6 Bn so far this year!). As the shares fall - as they did this week - Intel will post a gain, a paper profit. (If I understand it correctly.) In any case, this charge is non-cash and non-operating, and analysts rightly disregard it in examining Intel's true earnings.]

The Uncertainty Discount

The two pillars of the company's strategic turnaround plan are (1) bringing AI-related products to market, and (2) reviving and building the company's foundry business. Intel appears to have established a profitable foothold in the AI market, and its foundry revenues are growing. Yields on its latest cutting edge fabrication processes are improving by "double digits."

The broad uncertainties which account for much of the shock reaction this week revolve around these two objectives. How fast and how large Intel's AI business can grow? Can it become a "major AI player" or even a credible secondary one? It is not there yet. And can Intel's capex-intensive foundry business return to profitability and a fully competitive position in the industry? The foundry is still loss-making, but losses decreased by $1.4 Bn in Q3 2026 compared to the previous year.

These are uncertainties about the upside, not the downside, for the company. But there is still a discount that accounts for the amplified sensitivity of Intel's share price to the technology sector thunderclap, compared to some of its peers.

So far, then, the picture is one of positive trends, but also questions. One might say that compared to a year ago (when the share price was below $20), the strategic weakness - concern about the downside and even the company's viability - has been converted into strategic uncertainty about the scale of the upside.

But the market is still missing the most important "asset" that Intel possesses, which should actually dominate the calculation.

Too Strategic To Fail

Nvidia is the champion of this technological/financial moment, the first company to reach $5 Tn in market capitalization - a year ago this very week. On Friday, Apple became the second five-trillionare. These two companies alone are worth more than half the value of the annual Gross Domestic Product of all 27 countries in the European Union combined.

Now consider that neither Nvidia nor Apple manufactures anything. Nvidia does not produce a single semiconductor chip. Nor does Apple. Both rely on so-called fabless business models. They design, and outsource actual production to others. And for their most critical component - without which their combined $10 trillion businesses would stall out - they both outsource to a single company. That is, they are both completely dependent on the same sole source supplier.

That supplier is of course Taiwan Semiconductor Manufacturing Company (TSMC). TSMC fabricates almost all of the world's high-performance processors. They produce chips not only for Nvidia and Apple, but for AMD, Google, Amazon, Microsoft, Broadcom... Virtually the entire semiconductor industry relies on a single supplier.

There are only two other companies in the world who can do what TSMC does. Samsung in Korea, and Intel. They are the only high-end foundries left.

Now consider the geopolitics. TSMC is of course based principally in Taiwan. It is clearly an asset at risk in any conflict that may arise as China would seek to assert its control over the island. And Samsung's Korean plants are just 50-75 miles from the border with North Korea.

Intel is the only American company in the game.

This clearly has national security implications, and the U.S. government's investment in Intel last year included incentives designed to keep the foundry business going. Many people have suggested that Intel ought to spin off its foundry, as others in the industry (e.g., AMD) have done. Wall Street would love it. But it is hard to imagine that Intel would be allowed to do so, unless the foundry is first restored to full TSMC-comparable status, and can show TSMC-like business sustainability. The national interest is too much at stake.

The commercial aspect of "too-strategic-to-fail" is also important. Nvidia itself invested $5 billion in Intel last December. Microsoft had already signed a multi-billion dollar deal with Intel's foundry the previous year. In April, Intel was brought into Elon Musk's Terafab project, to produce a new source of AI "compute" silicon. These are all signs of the obvious: no customer wants to be dependent for a critical component on a sole source. All the big players in the fabless chip industry have an interest in helping to develop a strong alternative source, preferably based in America rather than poised on the edge of some geopolitical San Andreas faultline.

National security concerns, and normal market capitalism, both create an urgent need to see that Intel succeeds. This is the foundational principle of the investment thesis.

The first column I wrote on Intel in 2023 called it a clear "value play" when the stock was about $34 a share. Not long afterwards it fell as low as $19 a share. But the timing of value investments has been studied and the average holding time is measured in years, not days or quarters. The typical time frame for a value payoff is at least 18-24 months on average, and often longer. This Spring, just about 24 months after my first call, the stock reached $142 a share and I was (briefly) a stock-picking genius in the eyes of my students. With Intel shares now suddenly back to $65, the applause has subsided. However ...

Intel is still in fact far Too-Strategic-To-Fail. The U.S. government and the multi-trillion dollar semiconductor companies that need a strong second source will not let it happen. The noise will subside, and if last Friday's haircut was an overreaction, well...enjoy.

This is a rare circumstance. There are not very many companies that are TSTF. And when a company is TSTF and also so out of favor for various reasons, it makes for a strong value play. Intel at $65 a share still fits the profile.

The only other similar example I see right now is... Boeing. (But that's another story.)