Rare earths were just one of many issues that arose during the salvos of the recent trade war between the United States and China. The tensions between the two nations seem to have eased -- a little at least -- with the nations' recent announcement of a 90-day pause regarding the recently heightened tariffs.
But a 90-day pause doesn't mean the strife between Washington and Beijing has been resolved.
Businesses, naturally, are watching the negotiations closely -- especially tech companies like Intel (INTC +11.93%), which relies heavily on rare earths. With China a powerful player in the supply of rare earths, investors will also want to keep a close eye on how the two nations proceed with respect to the coveted minerals. Intel's growth plans, after all, could be greatly impaired if the trade war starts to escalate again.
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Reading into the risks regarding rare earths
While most will recognize silicon as an element that's synonymous with semiconductors, rare earths also play a critical role in their production thanks to their unique physical properties. They're so important, in fact, that Intel addressed rare earths among its risk factors in its most-recent 10-Q. The first risk factor identified in the quarterly report states, "Recently elevated geopolitical tensions, volatility and uncertainty with respect to international trade policies, including tariffs and export controls, may have a material adverse impact on our business, the markets in which we compete and the world economy."
In particular, Intel recognizes that its supply chain relies on a variety of raw materials including "rare earth minerals, that may become difficult or more costly to obtain, which may impair our ability to manufacture our products and increase our costs."
Amid all of the discussion regarding its supply chain, international trade policies, and rare earths, China is the only nation that Intel identifies as posing a risk. It is unsurprising that China figures so prominently in the discussion considering how it dominates the global supply of rare earths.
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Insufficient rare earths could bury Intel's growth plans
After battling through a challenging 2024, which included a 2% year-over-year decline in revenue, Intel announced a restructuring plan that featured a series of initiatives to reduce expenses, including downsizing staff and reevaluating its businesses. In addition to cutting costs, Intel recognizes progress in growing its foundry business as a catalyst for ameliorating its financial position.
With the support of about $8 billion in funding from the CHIPS Act, Intel expects to commence high-volume production of its Intel 18A process node in 2025. This, in turn, will support production of Panther Lake, a new client family of products that represent the first processors on Intel 18A.
Waxing optimistic about the prospects on Intel's fourth-quarter 2024 conference call, David Zinsner, Intel's chief financial officer, said that the company is "excited by the launch of Panther Lake this year and the internal ramp of Intel 18A in the second half that will support increased volumes and improved profitability in 2026."
While it's unclear whether a constrained supply of rare earths from China would impair Intel's ability to produce 18A and Panther Lake, what's fairly certain is that a shortage of rare earths could impede the growth of data centers.
Digging deeper into the danger of reduced rare earths supply
Besides their use in cooling fans, rare earths form powerful magnets that are found in hard drives and other components used in data centers. Artificial intelligence (AI) companies like Microsoft -- already an Intel 18A customer -- are pouring billions into the development of data centers, one of several applications for Intel 18A. Should the development of data centers wane due to an inadequate supply of rare earths, the deleterious effects could trickle down to Intel.
Of course, it's also important to acknowledge that Intel generates substantial revenue from its own data center business. From Xenon processors to Gaudi processors to software products, there are a various products that comprise Intel's data center and AI (DCAI) business. In 2024, DCAI revenue totaled $16.1 billion, or 30.4% of consolidated sales. This business could, likewise, be adversely impacted by constrained supply of rare earths.
Is now the time for investors to turn their backs on Intel stock?
Intel's business could clearly suffer if China decides to restrict exports of rare earths again, but this alone isn't reason enough for investors to dismiss Intel stock. The fact that shares are currently trading at 14 times operating cash flow, a steep premium to the five-year average cash flow multiple of 7, is also important to recognize. With shares richly valued and uncertainty regarding trade with China, investors wary of risk will want to watch Intel from the sidelines at this point.
