1 Way Intel Will Boost Foundry Profits After $7 Billion Loss

By | April 4, 2024

From the first quarter of 2024 Intel (NASDAQ: INTC) will report its foundry operations as a separate business unit. This is part of the company’s plan to become a major player in the foundry market by 2030. Intel’s product divisions will treat the foundry more like a third-party supplier, and the foundry will treat Intel’s product divisions as customers.

In preparation for this transition, Intel has adjusted its financial statements for the past several years to reflect the new reporting structure. The foundry sector is currently very unprofitable, which should not be surprising. Nearly all of Intel’s foundry revenue is internal, the company has invested heavily in new manufacturing technology and facilities, and the post-pandemic PC market crash has reduced demand for the company’s chips.

The stock market reacted poorly to the revelation, sending Intel shares plummeting lower on Wednesday. Intel’s foundry segment reported an operating loss of nearly $7 billion in 2023. The company’s assurances that the foundry segment would break even around 2027 and achieve an adjusted operating margin of 30% by 2030 did little to lift investor sentiment.

Why profits can grow quickly once the ball gets rolling

It is striking that the foundry segment only recently started operating as its own business unit. That $7 billion loss by 2023 is partly a result of Intel’s production costs historically being spread across its product divisions.

While Intel’s revised financial statements are useful to investors, they may not be as meaningful as a guide to future results. The product divisions have historically had little incentive to efficiently utilize Intel’s manufacturing side. In addition to the low-hanging fruit of cost savings that can be realized now that the foundry is its own business entity, the move to serve both external and internal customers will extend the life of Intel’s manufacturing assets.

When Intel only made chips for itself, usage of a given process node quickly fell away as soon as a new process node came online. With capital requirements exploding for leading semiconductor foundries, this business model simply doesn’t work anymore.

Under the foundry model, Intel can extend the life of its process nodes. The Intel 3 process, which the company will use for its upcoming server CPUs, will also be available to foundry customers. The company plans multiple revisions of Intel 3, adding new features and improved performance. Once the node is no longer suitable for advanced products, it can still be attractive to customers seeking mature, cost-effective manufacturing.

Intel will play a similar game with the Intel 18A process, which will be ready in early 2025, and the next-generation Intel 14A process. Both process nodes will undergo revisions that will extend their useful life well beyond what would be possible if the company only planned to produce its own chips.

About a third of the market leaders TSMCThe company’s revenues come from process nodes that are 10 nanometers (nm) or older, and 24% of revenues continue to come from process nodes that are 28 nm or older. (For perspective, TSMC launched its 28nm node in 2011.) Improvements have been made to these older nodes over time, but these long-ago investments continue to pay off. Intel will try to replicate this model.

Intel’s goals are not far-fetched

While some investors may have difficulty believing that Intel can return its foundry business from a $7 billion annual loss to a 30% operating profit margin by 2030, this shift in how the company uses its manufacturing assets will be a powerful profit driver. Intel 3, Intel 18A, Intel 14A and other future nodes will generate revenue for a long time. The company will spend approximately $100 billion on building and expanding manufacturing facilities in the US alone, something that would not be feasible if new process nodes did not have long lifespans.

Once Intel’s foundry business starts generating meaningful revenue from external customers, its earnings picture could improve quickly. The company’s goals may seem ambitious, and it certainly has a lot to prove, but Intel’s goals are realistic.

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Timothy Green has positions in Intel. The Motley Fool holds and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

1 Way Intel will boost foundry profits after $7 billion loss was originally published by The Motley Fool

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