Does Intel’s new $3 billion deal with the Pentagon encourage stock purchases?

Semiconductor stocks are among the biggest winners in the red-hot artificial intelligence (AI) race. Among the more famous chip companies is Intel (INTC 1.48%)which recently secured a contract worth up to $3 billion from the US Department of Defense (DOD).

Let’s take a look at this deal and its current impact on Intel’s growth. Moreover, after a thorough analysis of the shares, I will express my opinion whether now is a good time to buy Intel shares.

I’m starting to notice a pattern with Intel

President Joe Biden has been busy over the past four years. In my opinion, an often overlooked piece of legislation from the Biden-Harris administration is the CHIPS and Science Act. One of the biggest initiatives resulting from the CHIPS Act is the creation of more semiconductor manufacturing and research positions in the US

In September, Intel was awarded a contract worth up to $3 billion under the CHIPS Act Secure Enclave program. According to the Department of Defense website, the Secure Enclave project is intended to “support microelectronics manufacturing and provide access to the national supply chain of advanced semiconductors for national security.”

This is not the first time Intel has been a beneficiary of the CHIPS Act. In March, Intel and the Commerce Department agreed to initial terms on $8.5 billion in financing to help the company build additional manufacturing facilities in Arizona, Ohio, Oregon and New Mexico.

While these deals are an important step toward bringing more chip investment to the U.S. from abroad, I see some downsides to Intel’s government business.

Disadvantages of public sector activities

Unpredictability is a risk in any type of transaction. However, I believe that the activities of the public sector are much less predictable compared to the private sector. Government initiatives are sensitive to budget cuts and priorities often change dramatically under different political administrations.

Despite their unpredictability, large government contracts can prove to be a lucrative source of stable business. However, focusing on renewing permanent contracts with the public sector may have the opportunity cost of investing in new product development outside of these government contracts. For these reasons, companies that rely heavily on government capabilities are at risk of being perceived as less innovative compared to similar companies.

Finally, it is natural that transactions in the public sector are subject to greater scrutiny compared to opportunities offered in the private sector. If a company fails to meet its goals or expectations, investors may come to view the company more negatively than is warranted solely because of their knowledge of failures in high-profile, reported deals.

Can Intel stock be bought now?

The chart below illustrates 2024 earnings so far for a number of semiconductor stocks. The obvious outlier in the chart is Intel, and not in a good way. The company’s negative return of 55% so far this year doesn’t exactly inspire confidence – especially since many other chip stocks are performing better than S&P500 AND Nasdaq Composite.

INTC data by YCharts

Billionaire investor Leon Cooperman perhaps summed it up best last week on his CNBC episode A squeaky box when he said Intel was receiving “government aid.” It’s hard to put it this way, but it’s not necessarily untrue.

Despite some important work with the federal government, Intel can’t kick its engine into a new gear. Revenues and cash flow continue to trend in the wrong direction. You can trace most of the slowdown to Intel’s business results Taiwanese semiconductor productionwhich continues to gain more offers and lucrative opportunities from the biggest players in the technology industry.

INTC revenue data (quarterly) by YCharts

While CHIPS Act agreements have received much publicity, they have not yet translated into long-term, significant opportunities for Intel. I don’t see Intel’s new $3 billion deal as a reason to buy the stock. In my opinion, Intel’s falling share price is justified, and I wouldn’t be surprised if it dropped even lower.

Adam Spatacco has positions at Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and the following options: Intel November 2024 short calls for $24. The Motley Fool has a disclosure policy.