Why We Like Intel’s Move to Divest Its Memory Business

On Oct. 20, Intel INTC announced it will sell its NAND business to SK Hynix for $9 billion. At first glance, we like the deal, as the company will streamline its focus on its core competency of CPU design and manufacturing, and the price received appears reasonable. We are maintaining our $70 fair value estimate for wide-moat Intel and continue to view shares as undervalued.

The primary assets include Intel’s NAND solid-state drive business, the NAND component and wafer business, and Intel’s NAND manufacturing facility in Dalian, China. Management had said it was open to divesting the memory business at its 2019 investor meeting. Intel’s NAND flash is primarily used in SSDs for PCs and servers. As scaling has become more challenging for NAND, manufacturers have had to pursue 3D NAND, which requires a step function increase in capital equipment relative to planar NAND. Thus, we think it requires massive investments to be cost-effective. Meanwhile, the NAND market has faced a weaker pricing environment and oversupply situation since 2018, and Intel’s 7-nanometer process technology delay has raised questions of whether Intel could remain at the forefront of semiconductor manufacturing. Intel’s memory segment has operated at a loss in recent years as a result of these headwinds (though it did turn an operating profit of $322 million in the second quarter of this year). We assume Intel’s memory business would generate about $5.6 billion in revenue in 2020, though these sales are materially margin-dilutive.

The deal is expected to close in late 2021. After the required regulatory approvals, SK Hynix will receive the NAND SSD business and Dalian fab, with Intel receiving a payment of $7 billion. SK Hynix will acquire the remaining assets, including IP related to the manufacture and design of NAND wafers, research and development employees, and the Dalian fab workforce, upon final closing in March 2025, with the remaining $2 billion paid to Intel.

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