Intel Investors: Don't Count on Qualcomm to Save the Day
Intel's (NASDAQ: INTC) stock was cut in half this year as the chipmaker struggled with slowing sales, shrinking gross margins, and its inability to catch up to Taiwan Semiconductor Manufacturing and Samsung in the high-end foundry market. Those challenges drove it to suspend its dividend, lay off more than 15% of its workforce, and even consider selling or spinning off its foundry and programmable chip divisions.
However, Intel's stock recently rallied amid rumors that Qualcomm (NASDAQ: QCOM) may be mulling a takeover of the troubled chipmaker. That deal would create a chipmaking titan by merging Intel's x86 CPUs, which lead the PC and server markets, with Qualcomm's mobile system on chips (SoCs), which rank second in the smartphone SoC market after MediaTek. That seems like a win-win situation for both chipmakers, but I don't think it will happen for four simple reasons.
Image source: Getty Images.
1. It would never be approved by antitrust regulators
Intel still controls 61.5% of the x86 CPU market, according to PassMark Software, while its main competitor Advanced Micro Devices holds a 35.8% share. Qualcomm's Snapdragon chips account for 31% of the mobile SoC market, according to Counterpoint Research, while MediaTek has a 32% share.
Qualcomm and MediaTek are also the world's two largest producers of Arm-based chips. Combining the x86 and Arm architectures under one roof would likely spark fierce objections from other chipmakers and antitrust regulators. Antitrust pressure also forced Nvidia to abandon its attempted takeover of Arm in 2022.
2. Their business models are mismatched
Qualcomm is a fabless chipmaker that outsources all of its manufacturing to third-party foundries like TSMC. Intel is an integrated device manufacturer (IDM) that manufactures most of its chips at its own first-party foundries.
Qualcomm also generates most of its profits from its higher-margin licensing business, which leverages its massive portfolio of wireless patents to squeeze royalties and licensing fees from every smartphone sold worldwide (including those that don't use Qualcomm's SoCs). That's why Qualcomm consistently generates much higher operating margins than Intel.
But if Qualcomm buys Intel in its current form, it would inherit its capital-intensive foundry business that remains far behind TSMC and Samsung in the "process race" to produce smaller, denser, and more power-efficient chips. Qualcomm would also likely need to start manufacturing its own chips at those struggling plants instead of outsourcing them to other foundries.
Therefore, it doesn't make any sense for Qualcomm to crush its own operating margins by absorbing Intel's slower-growing and less-profitable foundries. A takeover might be worthwhile if Intel divests the foundry unit or eventually sells itself off in pieces, but that messy process would still probably attract plenty of attention from antitrust regulators.
3. It wouldn't complement its long-term strategies
Qualcomm still generates more than three-quarters of its chipmaking revenue from smartphones, but that market is saturated, maturing, and highly cyclical. So to reduce its long-term dependence on smartphones, Qualcomm has been expanding its smaller automotive and Internet of Things (IoT) chip divisions. That's why it tried to acquire the automotive chip giant NXP Semiconductors six years ago.
Qualcomm's takeover of NXP was never approved, but it would make a lot more sense for the chipmaker to make a fresh bid for NXP instead of Intel. Intel actually shut down its wearables group in 2018, scaled back its other IoT efforts, and spun off its automotive subsidiary Mobileye in an IPO in 2022. In other words, buying Intel wouldn't meaningfully complement Qualcomm's expansion of its automotive and IoT businesses.
4. The price tag is too high
Intel still has an enterprise value of $124 billion. Even with a conservative acquisition premium of 20%, Intel would have a price tag of nearly $150 billion. Qualcomm ended its latest quarter with $13 billion in cash, cash equivalents, and marketable securities. It was also shouldering $13 billion in long-term debt with a debt-to-equity ratio of 1.1.
Therefore, Qualcomm would need to fund most of that acquisition with its own stock. It has an enterprise value of nearly $190 billion with 1.1 billion outstanding shares, but over 80% of those shares are already owned by institutional investors.
So to fund a takeover of Intel, Qualcomm would need to issue a lot more shares -- but that would cancel out its billions of dollars in buybacks in recent years. It would also weaken its own balance sheet by inheriting Intel's $48 billion in debt.
Intel's investors shouldn't bet on a takeover
I doubt Qualcomm wants to buy Intel and throttle its own growth, crush its margins, and wreck its balance sheet. So instead of wondering if Intel will ever be saved by a buyout, investors should focus on the more likely scenario that it shrinks or breaks up its business. If it manages to right-size itself and shift gears, it might just become a worthy investment again.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel, Mobileye Global, and NXP Semiconductors and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
