Intel's Factory Operations Could Potentially Experience a Resurgence
Intel's Factory Operations Could Potentially Experience a Resurgence
Intel's stock has experienced a significant decrease of over 55% this year, currently trading at around $21 per share. While a portion of this drop can be attributed to Intel's market share decline in the CPU sector and the industry shift towards AI-focused GPU chips for data centers, the main issue for Intel has been its foundry business. Over the past two years, Intel has invested approximately $25 billion into this sector, yet the results have been less than satisfactory. The foundry reported an operating loss of $7 billion on revenue of $18.9 billion. However, there's potential for a turnaround, according to some analysts. Intel's upcoming 18A fabrication process technology is almost ready for deployment. Additionally, Intel seems to be benefiting from regulatory support under the Trump administration due to its strategic importance to U.S. technological independence. Consider investigating the possibility of selling Nvidia stock and buying Intel share.
Intel's Future with 18A Process
Intel is heavily banking on its 18A process, which it considers its most advanced yet, to revitalize its foundry business. This process employs technologies such as RibbonFET gate-all-around transistors and PowerVia backside power delivery, which are expected to enhance performance and power efficiency. The chips using this process will operate on a 1.8-nanometer node size, placing Intel slightly ahead of TSMC’s N2 process which operates at a 2 nm node and is expected to arrive in the second half of 2025. While TSMC claims that its N2 process will surpass Intel's 18A in specific areas, like SRAM density, Intel's backside power delivery offers a competitive edge with reduced power loss and superior thermal performance. Any significant updates on this new chip’s progress, whether positive or negative, could escalate stock volatility.
Intel announced in August that it had achieved critical milestones with chips crafted using the 18A process. These chips were demonstrated to power on, boot operating systems, and function within Intel. The company expects external customers to begin designing their first 18A chips for manufacturing in 2025, with full-scale production following soon after. Intel has secured significant contracts with this technology, including a deal with the U.S. Department of Defense for the RAMP-C program, which aims to bring advanced semiconductor technology domestically. Other high-profile customers include Amazon and Microsoft, which plan to develop custom chips, including AI accelerators.
Although there have been reports suggesting that Intel faced yield issues with its 18A process, these claims were disputed by Intel's former CEO, Pat Gelsinger. Intel states that its 18A process exhibits defect density figures of 0.4 defects per square centimeter at this stage of development, which is only slightly worse than TSMC's benchmarks of 0.33 defects on its legacy N7 and N5 nodes at similar stages. Given that the industry standard for this stage is typically below 0.5 defects per square centimeter, it suggests that Intel could be within acceptable industry standards for advanced nodes and should be capable of generating usable yields.
Intel Foundry's Growing Geopolitical Significance
The emphasis on boosting U.S. manufacturing under President-elect Trump might benefit Intel, considering its substantial domestic fabrication infrastructure. There's a possibility that Intel could garner significant regulatory support aimed at boosting domestic chip production. For instance, the new administration could impose tariffs that increase the cost of foreign fabrication companies producing and exporting chips to the U.S. A focus on domestic production, either through tariffs or other policies, could attract more business to Intel. Intel's foundry division, which manufactures chips for third-party clients, could also see an increase in demand as companies seek to rely on U.S. suppliers to avoid potential tariffs.
Semiconductors play a critical role in national security – an area that Trump has consistently emphasized – and Intel’s domestic manufacturing capabilities are likely to be vital in helping the U.S. secure its technological independence. Intel may also see a higher number of government contracts due to being the only American semiconductor company that both designs and fabricates advanced logic chips in the U.S. Intel received a $3 billion government contract to expand chip production for the U.S. military a few months ago, and it's possible that this could increase further under Trump, who increased military spending during his previous term.
Intel's vast fabrication capacity and its newest process nodes could help U.S.-based semiconductor designs better secure their supply chains. For example, Nvidia, which heavily relies on Taiwan’s TSMC to manufacture its cutting-edge AI chips, would experience less supply chain risk with Intel's U.S.-based manufacturing.
The fluctuation in Intel's (INTC) stock value over the past 4 years hasn't been predictable, with a considerable variability compared to the S&P 500. The stock's returns were 6% in 2021, plummeted to -47% in 2022, and skyrocketed to 95% in 2023. Conversely, the Trefis 'High Quality Portfolio', comprising 30 stocks, shows less volatility and has surpassed the S&P 500 yearly during this period. The reason behind this? This portfolio's stocks generally delivered better profits with reduced risk relative to the index, presenting a less tumultuous journey as shown in the HQ Portfolio's performance statistics.
Given the current economic instability centered on interest rate reductions and multiple conflicts, is there a chance that INTC may mirror its 2021 and 2022 underperformance compared to the S&P in the coming 12 months, or will it recover?
Foundry Assets Act as a Safeguard for Intel's Valuation
The semiconductor foundry business is fraught with risk, requiring management to commit substantial capital investments based on assumptions about futuristic technologies, years before the actual demand emerges. Despite Intel encountering significant setbacks in its current investment cycle, the stock's downside potential appears to be minimal at the moment. Intel's stock currently is valued at less than 1x its net asset value, or in simple terms, the company's assets minus liabilities. This means the market is assigning a value equal to that of its tangible assets while completely disregarding its exceptional chip manufacturing and design expertise, its significance to national security, and its future potential. This creates a tantalizing opportunity for investors who envision growth beyond its substantial balance sheet. Moreover, Intel's stock trades at approximately 21x its projected 2025 earnings, which are currently depressed due to its excessive foundry spending and recent market share losses. Forecasts suggest an earnings figure of approximately $1 per share for the upcoming year, down from nearly $2 in 2022 and about $5 in 2021. With an improvement in demand, we could witness a turnaround in both earnings and Intel's valuation multiple.
Intel's new co-CEOs have announced that the company's foundry business is undergoing a shift to become a subsidiary, potentially allowing it to operate independently from the chip design sector. Furthermore, they hinted at the possibility of eventually separating this business segment from the rest of the company, which could potentially unlock some value. Based on our analysis, we value Intel stock at around $27 per share, 30% higher than its current market price. Explore our assessment of Intel's valuation: Affordable or Overpriced?
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Despite Intel's current struggles in its foundry business, with a reported operating loss of $7 billion on revenue of $18.9 billion, some analysts see potential for a turnaround. This is largely due to Intel's upcoming 18A fabrication process technology, which is almost ready for deployment and is expected to enhance performance and power efficiency.
Given Intel's substantial domestic fabrication infrastructure and the potential for regulatory support under the Trump administration, the sale of Nvidia stock and purchase of Intel shares could be an opportunity to capitalize on Intel's foundry business revitalization and geopolitical significance.