Intel Is Selling $15 Billion of Stock to Fund the AI Build-Out. The Dilution Is About 3%. The Premarket Hit Was 5%.

Before Monday's open, Intel (NASDAQ: INTC) announced a $15 billion sale of new common stock -- an underwritten offering, with an option for the banks running it to buy up to $2.25 billion more. Shares fell almost 5% in premarket trading on the news, and they were still lower, at around $98 as of this writing.

The reaction is understandable. A stock sale means more shares outstanding, and more shares mean each existing one owns a smaller slice of the company.

But the size of the drop is worth setting against the size of the sale. Intel's market value is about $500 billion, so $15 billion of new stock hands away about 3% of the company.

In other words, the market's first move took almost 5% off a company that is selling about 3% of itself. What explains the difference?

About 3% more shares

At the stock's current price, $15 billion works out to about 150 million new shares on top of the 5.04 billion Intel already has outstanding. If the underwriters take their full option, the total could reach $17.25 billion, or about 3.5% of the company.

And Intel is selling at a price few could have imagined a year ago, when shares traded near $20. They cost about five times that today, even after Monday's decline.

I think the timing is the more interesting part: a company raising money with an expensive stock gives up far fewer shares for the same dollars.

Intel also said the offering is intended to let it pursue the growth opportunities ahead while "maintaining a strong balance sheet and its commitment to an investment-grade rating." In short, the company wants the money without adding debt.

The money is going into factories

The release points the proceeds at "general corporate purposes," including capital expenditures and working capital. That part is boilerplate. The demand picture behind it is not. Intel said customers "continue to signal a strong and sustainable demand environment, driven by unprecedented investment in AI compute."

The company's most recent results back that up. Second-quarter revenue rose 25% year over year to $16.1 billion, Intel's strongest growth in more than 15 years. Its data center and artificial intelligence (AI) segment grew revenue 59% year over year, and management said its AI-driven businesses collectively grew more than 70% year over year while contributing about 70% of revenue. On the July earnings call, management also said demand continues to outpace the company's growing supply, describing the industry's shortages of wafers, memory, and substrates as among the most severe in its history.

The spending plan has been climbing to match. Intel entered the year planning less, then raised its 2026 capital spending outlook to more than $20 billion in July. And it is forecasting 2027 spending significantly above that. Chief financial officer David Zinsner also noted that Intel's U.S. spending on tools and factory space from 2021 through 2026 is approaching $100 billion.

Set that against what the business currently generates ($7.0 billion of operating cash flow in the second quarter, with about $30 billion of cash and short-term investments on hand) and the logic of the sale is straightforward. The build-out is growing faster than the profits that are supposed to eventually pay for it.

An overreaction?

Judged purely on the arithmetic, maybe. Almost 5% is a big penalty for 3% dilution, and the stock's partial recovery through Monday morning suggests some investors did the same math.

But I'd argue the sale told investors something the share count alone doesn't. Intel lost $2.16 per share last quarter under generally accepted accounting principles (GAAP), and even its non-GAAP (adjusted) earnings of $0.42 per share work out to only about $2 billion a quarter against a capital budget above $20 billion this year. For now, the factories are being funded with stock sales and outside money while the earnings catch up.

And Monday's announcement says that arrangement isn't winding down. After all, the company is forecasting more capital spending next year, not less.

The price, meanwhile, still assumes the bet pays off. Even after Monday's decline, shares trade at a forward price-to-earnings ratio of about 60 -- 60 times what analysts expect the company to earn over the coming year. Buyers of the new stock are paying today for profits that arrive only if the foundry build-out delivers.

Ultimately, the dilution is modest and the timing is sensible. Selling stock near a high is the cheap way to fund a factory build, and doing it without new debt protects the balance sheet. What Monday's drop priced in, I think, is a reminder of whose money carries the build-out until the earnings arrive. On Monday, Intel asked investors for another $15 billion of it.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel. The Motley Fool has a disclosure policy.