The biggest change Intelof (NASDAQ: INTC) Under CEO Pat Gelsinger’s leadership, the strategy over the past few years has been opening up manufacturing operations to third parties. This isn’t Intel’s first attempt to build its foundry business — it tried and failed in the nearly five years that ended in 2018, though that effort was narrower than what it wants to achieve now.
This time, Intel is all in. Manufacturing has been split into a separate business unit, and the company plans to regain its manufacturing edge. TSMC by early 2025 with an advanced Intel 18A process node. While details are scarce, it is gathering customers for the Intel 18A as well as advanced packaging services.
It’s almost a miracle that Intel managed to catch up to TSMC technologically after so many years of production delays. If the company can pull it off, foundry could one day be Intel’s biggest source of revenue.
On the right track
Currently, Intel’s foundry business derives revenue primarily from traditional packaging services. One of the reasons for the company’s weak first-quarter guidance was an expected decline in demand for traditional packaging, which is not a high-margin business where Intel can gain a competitive advantage. As the casting business takes off, it won’t be in the limelight.
Wafer manufacturing and advanced packaging will be the two main services offered by Intel. Today, none generate significant revenue from foreign clients.
On the production side, the two processor nodes offered, Intel 3 and Intel 18A, are not yet ready for volume production. Intel 3 is just around the corner, Intel’s next-generation server CPUs will use this process in the first half of this year. Intel 18A won’t be far behind in early 2025.
It takes time to turn commitments into revenue on the advanced packaging front. Intel has won just five advanced packaging customers, but doesn’t expect to start generating meaningful revenue until 2025. The company recently opened a new state-of-the-art packaging facility in New Mexico to supply its products and those of foreign foundry customers.
Intel has 50 test chips for 2024 and 2025, three-quarters of which are on the Intel 18A process. The company already has four customers committed to the Intel 18A, although little is known about them. In wafer fabrication and advanced packaging, Intel announced that the total lifetime contract value now exceeds $10 billion.
The story of 2025 and 2026
Intel CEO Pat Gelsinger noted on his fourth-quarter earnings call that it will take several quarters for the advanced packaging gain to translate into revenue, and potentially years for the wafer manufacturing gain to translate into revenue. While Intel 18A is expected to be ready in early 2025, it will take time for revenue to grow.
By the end of 2026, it should be clear whether Intel’s shedding strategy is working. The global casting market is currently worth more than $100 billion and is expected to more than double by 2032. Intel’s $10 billion pipeline is noteworthy, but it’s a bit low because it will turn into revenue over several years.
The bulk business will get off to a weak start in 2024 with traditional packaging revenues declining. That $10 billion pipeline won’t begin meaningfully generating revenue until 2025, so the foundry business could weigh on Intel’s results for much of 2024. But it is always dark until morning.
As Intel closes the technology gap with TSMC in 2025 and possibly beyond, the company’s foundry will figure in every conversation about manufacturing among major chip designers. Intel has a lot of balls in the air right now, and a lot that could go wrong. But once the foundry business comes into its own, the company is poised for incredible growth.
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Timothy Green holds positions at Intel. The Motley Fool owns and recommends positions in Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: $57.50 on Intel January 2023, $45 on Intel January 2025, and $47 on Intel February 2024 calls. The Motley Fool has a disclosure policy.
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