Intel stock (NASDAQ:INTC) announced on March 20 that it would receive $8.5 billion in direct funding under the CHIPS and Science Act to help complete its chip projects in Arizona, New Mexico, Ohio, and Oregon. Nvidia (NASDAQ:NVDA) stock barely moved on the news.
Down 16% since the announcement and 26% year-to-date, it doesn’t seem like investors care about the money made available for its infrastructure plans.
“AI is supercharging the digital revolution and everything digital needs semiconductors. CHIPS Act support will help to ensure that Intel and the U.S. stay at the forefront of the AI era as we build a resilient and sustainable semiconductor supply chain to power our nation’s future,” stated Intel CEO Pat Gelsinger in its March 20 press release.
Some offshore companies also get money from the Biden administration, diminishing some enthusiasm about the news.
However, with a glass-half-full perspective, investors ought to care about the financial assistance Intel is getting from the federal government. More importantly, here’s why that makes it a potential buy.
Why Should Investors Care?
The $8.5 billion headline number is direct funding from the CHIPS and Science Act through grants. However, it will also make up to $11 billion in loans available.
The Notice of Funding Opportunity (NOFO) says the interest rate on these loans is the Treasury Department’s cost of funds plus a portion of the spread between its cost and the market rate for a similar loan size and maturity.
So, it’s not getting a bargain basement loan, but it’s not paying through the nose, either.
The loans’ terms will be the construction period plus up to 15 years, with a maximum term of 25 years. Based on the maximum term, the loans would extend out to 2054 or 2055. As I look at its 10-K, only five outstanding bonds extend further. They have interest rates between 3.11% and 5.91%, suggesting that it will likely pay around 4% interest on these loans, but that’s just my estimate.
If I’m in the ballpark, that’s an excellent deal.
As for the amortization of these loans, the NOFO states, “Corporate finance loans will generally be bullet loans repayable at maturity. Project finance loans will generally be non-amortizing during the construction period of a project and then amortizing until maturity.”
Again, I’m not a lender or banker, but it seems more than reasonable.
Further, with the company planning to spend over $100 billion on its American chip capacity and capabilities, the 25% investment tax credit (ITC) could return another $25 billion from the investment, reducing its ultimate cost by an equal amount. With the grants included, based on $100 billion, the net investment falls to $66.5 billion.
So, regardless of what other companies are getting, this is important to Intel stock’s recovery.
Why’s INTC Stock a Buy?
There’s no question Intel stock is a contrarian bet based on Wall Street’s thoughts about the company. Of the 46 that cover its stock, only 10 (22%) rate it a Buy, with a target price of $44.80, 28% higher than where it’s currently trading.
Compare that to Nvidia, where 88% of the 60 analysts that cover its stock rate it a Buy, with a target price of $1,000, 18% higher than its current share price. Should the trend continue, Nvidia will report tremendous growth when it reports earnings on May 22. That will get analysts on their keyboards to raise target prices.
There is no comparison between the two. So, these grants, ITCs, and low-cost loans are far more important to Intel stock than Nvidia.
The company said in its Q4 2023 results that it expects non-GAAP earnings per share of 13 cents. Analysts are calling two cents more. For 2024, it’s $1.36 and $2.22 in 2025. Its share price is trading at 25.7x 2024 EPS and 15.8x 2025’s earnings.
Relative to its peers, its valuation remains stuck in neutral.
Intel stock will report its Q1 2024 results on April 25. It will be the first result of its new reporting structure. On April 2, it provided recast 2023 results based on its new operating structure. Intel Foundry, both internal and external revenue, was $18.91 billion, or 26% of revenue.
Right now, Foundry is losing money on its operations. Between now and 2030, it wants to break even and, optimally, achieve 40% non-GAAP gross margins and 30% non-GAAP margins.
If it gets there, it won’t be trading for $35.
It’s a buy for aggressive or patient investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.