Intel stock surges on plans to make AI chips for Amazon and to turn foundry into subsidiary

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Shares of Intel are surging before the market opens Tuesday after the chipmaker said its foundry business would make some custom artificial intelligence chips for Amazon Web Services as it attempts to reinvigorate its business.

CEO Pat Gelsinger said in a message to employees late Monday that Intel will create an AI fabric chip for Amazon's cloud services division at its foundry business, a struggling division that he said would become a subsidiary of Intel.

“A subsidiary structure will unlock important benefits,” Gelsinger said. “It provides our external foundry customers and suppliers with clearer separation and independence from the rest of Intel. Importantly, it also gives us future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation.”

Harlan Sur of JP Morgan believes that making the foundry business a subsidiary is a logical next step.

“We believe this move is a natural progression to drive better transparency and decision making/efficiencies and therefore should not be viewed as a surprise,” the analyst wrote in a note to clients.

Sur anticipates the shift could possibly lead to a spin out of the business over the next few years.

A board that includes independent directors will be created for the planned subsidiary.

Gelsinger also provided an update on Intel's cost-cutting efforts. The executive said that the chip maker, through voluntary early retirement and separation offerings, is more than halfway to its workforce reduction target of approximately 15,000 by the end of the year. He added that “difficult decisions” will still need to be made, with impacted employees being notified in the middle of October.

Intel also plans to reduce or exit about two-thirds of its real estate worldwide by year's end.

Shares of Intel Corp. jumped nearly 7% in premarket trading.