Why Intel’s foundry is ready for a comeback

Intel’s stock price has fallen more than 55% this year, trading at just about $21 per share. While some of the stock decline is due to Intel’s declining market share in the CPU space and the industry’s overall pivot to AI-focused GPU chips for data centers, the bigger problem for Intel is its foundry business. . Intel has invested about $25 billion in the business over the past two years, but results have been slow to emerge. The foundry reported an operating loss of $7 billion on revenue of $18.9 billion. That said, in our view, a turnaround is well within sight. Intel’s next-generation 18A manufacturing process technology is nearly ready for deployment, and the company also appears to be a major beneficiary of regulatory support under the Trump administration, given its strategic importance to U.S. technological independence. is. See why you should consider selling Nvidia and buying Intel stock.

Latest 18A process node

Intel is betting big on its 18A process, which it considers its most advanced yet, to rebuild its foundry business. The process produces chips with technologies such as RibbonFET gated all-round transistors and PowerVia backside power delivery, which are expected to improve performance and power efficiency. Chips using this process are based on a 1.8-nanometer node size, giving Intel a slight lead over TSMC’s N2 process, which operates at the 2-nanometer node and is expected to arrive in late 2025. . Meanwhile, TSMC is touting its N2 process as superior to Intel’s 18A in several key areas, including SRAM density (allowing more data to be stored in a smaller physical area), and backside power for Intel’s 18A. Demonstrates performance that exceeds. This reduces power losses, improves thermal performance, and increases competitiveness. Good news about the progress of new chips, or bad news if delays occur, can increase stock price volatility. Separately, if you want a smoother rise than individual stocks, consider the High Quality Portfolio, which has outperformed the S&P and returned over 91% since its inception.

Intel announced in early August that a chip made using its 18A process had reached a key milestone, saying the chip was powered on, booted into an operating system, and ran inside Intel. The company expects external customers to tape out the first 18A designs in 2025, with large-scale production beginning thereafter. Intel has won major contracts for this technology, including one with the U.S. Department of Defense under the RAMP-C program, which aims to bring cutting-edge semiconductor technology to the country. Other notable customers include Amazon and Microsoft, which will design custom chips that include AI accelerators. See also “Are Custom AI Chips Buying Marvell Stock?”

Rumors have been circulating that chipmaker Broadcom, which is testing Intel’s 18A process, is disappointed with the yields of the new process, but this was refuted by former Intel CEO Pat Gelsinger. Intel says its process currently has a defect density figure of 0.4 defects per square centimeter, compared to TSMC’s traditional N7 and N5 nodes at a comparable development stage about a year before going into mass production. It has 0.33 defects, which is only slightly worse than the benchmark. . Given that the standard at this stage of development is typically less than 0.5 pieces per square centimeter, Intel believes it is well within industry standards for advanced nodes and should be sufficient to produce usable yields. means.

Intel Foundry’s Growing Geopolitical Role President-elect Donald Trump’s focus on promoting U.S. manufacturing could work to Intel’s advantage, given the country’s vast manufacturing footprint. Intel could receive significant regulatory support aimed at boosting domestic chip production. For example, the new administration could consider imposing tariffs that would make it more costly for foreign manufacturers to make and export chips to the United States. A greater focus on domestic production through tariffs and other policies could bring more business to Intel. Intel’s foundry division, which produces chips for third-party customers, could also see increased demand, especially as companies look to rely on U.S. suppliers to avoid potential tariffs.

Semiconductors are also important to national security (an area Trump has consistently emphasized), and Intel’s domestic manufacturing base is likely to be critical to ensuring America’s technological independence. Intel is also likely to win more government contracts because it is the only U.S. semiconductor company that both designs and manufactures cutting-edge logic chips in the United States. That could grow even further under President Trump, who increased military spending months ago after winning a $3 billion government contract to expand it.

Intel’s vast manufacturing capacity and modern process nodes could also help make the domestic semiconductor design supply chain more secure. Take Nvidia for example. The GPU giant relies almost exclusively on Taiwan’s TSMC to produce its cutting-edge AI chips. Since TSMC is based in Taiwan, its production is susceptible to geopolitical tensions with China. Intel’s manufacturing base in the United States should greatly reduce that risk.

INTC stock’s decline over the past four years has been far from consistent, with annual returns much more volatile than the S&P 500. The stock returned 6% in 2021, -47% in 2022, and 95% in 2022. 2023. In contrast, the Trefis high-quality portfolio, which includes a collection of 30 stocks, has significantly lower volatility. And it has outperformed the S&P 500 every year over the same period. why is that? For the group as a whole, Headquarters portfolio stocks carried less risk and delivered better returns compared to the benchmark index. It’s not been a roller coaster ride, as evidenced by the performance metrics of our corporate portfolio.

Given the current uncertain macroeconomic environment surrounding rate cuts and multiple wars, could INTC face a similar situation in 2021 and 2022 and underperform the S&P over the next 12 months? , or will it recover?

Foundry assets provide backstop to Intel’s valuation

Semiconductor foundry operations are risky, given that managers must make large capital investment decisions based on forecasts of future technology demand years before it materializes. Intel has experienced some major failures in the current investment cycle, but the stock’s downside is likely quite limited at this point. Intel’s stock currently trades at less than 1 times its book value (effectively the net value of its assets less debt). This means that the market is pricing Intel’s tangible assets alone, completely discounting its technological know-how, growing importance to national security, and future prospects in Intel’s chip manufacturing and design. means. This presents an opportunity for investors who see potential beyond the company’s massive balance sheet. Intel stock also trades at just about 21 times expected 2025 earnings, but has been depressed by heavy foundry spending and recent market share declines. Earnings are expected to be about $1 a share next year, down from nearly $2 in 2022 and about $5 in 2021. If demand recovers, not only profits but also Intel’s valuation multiple could reverse.

Intel’s new co-chief executives say they are in the process of turning the company’s foundry business into a subsidiary, suggesting it could operate independently of its chip design division. There is. Executives also indicated that potentially separating the foundry business from the rest of the company is an option in the future. This could also help unlock some value in the end. Our Intel stock is valued at approximately $27 per share, 30% above the current market price. Check out our analysis of Intel’s valuation: Is it expensive or cheap?

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