Source: PaxForex Premium Analytics Portal, Fundamental Insight
Intel's journey toward revitalization encompasses various elements, yet at its core lies a bold and expensive endeavor to compete head-to-head with Taiwan Semiconductor Manufacturing in the semiconductor foundry arena. Intel relinquished its once-dominant manufacturing advantage due to persistent setbacks and misjudgments, allowing TSMC to surge ahead. Consequently, TSMC's clients, including AMD, have seized the opportunity to offer chips outperforming Intel in both speed and efficiency.
The evolution from being solely a chip manufacturer for its own products to becoming a semiconductor foundry catering to external clients has been, and will continue to be, a protracted process. A significant move this year was Intel's decision to establish a dedicated business unit for its manufacturing operations, complete with its own financial statement. Previously, manufacturing expenses were distributed across Intel's diverse product lines.
In April, Intel made a significant announcement regarding its revamped reporting structure, triggering a sharp decline in its stock value. This unveiling marked the first time the foundry segment was delineated separately, revealing figures that didn't resonate positively with investors. Specifically, the unit reported an operating loss of $7 billion against a revenue of $18.9 billion for the fiscal year 2023.
At first glance, a $7 billion loss in a sector pivotal to Intel's future might seem alarming, but delving deeper reveals crucial insights.
Primarily, the majority of Intel's foundry revenue currently stems from internal sources, primarily other segments within the company. Despite minimal external revenue in 2023, Intel made substantial investments in its manufacturing endeavors. While the associated costs now reflect in the foundry segment's financials, the returns on these investments are expected to materialize gradually over time.
Secondly, Intel has just initiated the transformation of its manufacturing operations into a distinct business unit. The reported results for 2023 reflect a previous era when manufacturing expenses were amalgamated across the company. Notably, Intel has already observed significant cost reductions by having the foundry treat product segments as individual customers. Requests for production expedites, known for their expense and adverse impact on manufacturing efficiency, have plummeted by 95% since product segments are now accountable for them directly. This shift heralds the potential for billions of dollars in annual cost savings under the new operational model.
For Intel's foundry segment to achieve profitability, generating substantial external revenue becomes imperative. The company anticipates reaching breakeven for the unit by approximately 2027, with an eventual operating margin target of 30%.
With $15 billion worth of foundry contracts already secured, encompassing wafer manufacturing and advanced packaging, Intel foresees external revenue exceeding $15 billion by 2030, a significant leap from its current levels.
Although Intel's ambitious vision of transitioning the foundry segment from losses to profits may seem ambitious, a fundamental shift in the economics of the company's manufacturing investments is poised to facilitate this transformation.
Traditionally, Intel's investments in new process nodes were primarily utilized for its own products and then phased out relatively quickly. However, under the foundry model, these process nodes can be leveraged for extended periods, as mature nodes are repurposed for diverse chip types. Consequently, investments made by Intel today are expected to yield returns over many years, surpassing the lifespan of previous investments.
The foundry initiative at Intel gains momentum next year with the introduction of the Intel 18A process, with significant revenue generation anticipated by 2026 as capacity ramps up. According to Intel, development of the Intel 18A process remains on schedule, with several prominent customers already lined up, including Microsoft.
While the current financial metrics may paint a grim picture for the foundry segment, the reported $7 billion annual loss should be contextualized. For investors with a long-term perspective, Intel represents a compelling turnaround opportunity worthy of consideration.
As long as the price is below 34.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 31.96
- Take Profit 1: 30.00
- Take Profit 2: 27.00
Alternative scenario:
If the level of 34.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 34.00
- Take Profit 1: 36.00
- Take Profit 2: 38.00
