Wall Street isn’t giving Intel (NASDAQ: INTC) any credit for the company’s push into the foundry business. Given Intel’s history of manufacturing delays, most notably with its 10nm process that’s now called Intel 7, it’s not unreasonable to doubt the company’s ability to pull off its audacious manufacturing roadmap.
Intel is in the process of launching five process nodes in a four-year span. The first is Intel 7, which is being used for current products, including Raptor Lake on the client side and Sapphire Rapids on the data-center side. Intel’s next-gen Meteor Lake PC chips will use Intel 4, which is ramping now for a fourth-quarter launch.
Next year, Intel will launch its Sierra Forest and Granite Rapids data-center central processing units (CPUs), which will be built on the Intel 3 process. Intel has an unnamed foundry customer lined up for Intel 3, although the party really starts once Intel completes its current roadmap. Intel 3 will be followed by Intel 20A and Intel 18A. It’s the Intel 18A that’s expected to be a game changer.
The Intel 18A process is expected to be ready for manufacturing by the end of 2024. Intel plans to regain manufacturing leadership over the Taiwan Semiconductor Manufacturing Company (TSMC) with Intel 18A, which will not only give it an advantage for its own products but also give potential foundry customers a compelling reason to consider moving some business to Intel.
In an interview at Deutsche Bank‘s 2023 Technology Conference, Intel CEO Pat Gelsinger disclosed that the company had received a large prepay from a future foundry customer for Intel 18A capacity. That’s a huge vote of confidence in Intel’s ability to get its Intel 18A process launched on time.
One benefit of this prepay is that Intel can use the cash to accelerate the build-out of some of its new foundry capacity. “So now customers are getting confident enough that they’re putting dollars on our balance sheet to accelerate our 18A capacity,” Gelsinger said. Intel is accelerating the build-out of its new facilities in Arizona, a $20 billion project that had a late 2021 groundbreaking.
Gelsinger also took a swipe at TSMC, saying: “So Arizona is great for us. Others might have difficulty. We love it.” TSMC is working on its own Arizona factory, but the company was forced to delay the opening until 2025 due to an apparent shortage of technical workers with the expertise required to install advanced semiconductor equipment. Intel doesn’t seem to be having the same problems.
Intel is unable to name the customer responsible for the prepay, but Gelsinger hopes to be able to reveal some customer names this year. Intel has struck an agreement with Arm to optimize the Intel 18A process for Arm chips, so it’s possible this customer is planning to build Arm-based smartphone chips in Intel’s factories.
Gelsinger also called out advanced packaging as a huge opportunity to bring new foundry customers to Intel. Advanced chips like AI accelerators generally require state-of-the-art advanced-packaging techniques, and given the intense demand for such chips, there’s a shortage of advanced-packaging capacity.
Intel plans to offer advanced-packaging services regardless of whether the chips were manufactured by Intel’s foundry. Gelsinger views advanced packaging as an “on-ramp” for foundry customers. “[I]f I can satisfy a near-term urgent need, get them comfortable with us and trusting us as their foundry supplier, my ability then to ramp them as a major wafer supplier as well I think is huge,” Gelsinger said.
The large prepay Intel received for Intel 18A capacity should give investors confidence that Intel’s foundry strategy will pay off in 2025 and beyond. The global foundry services market is expected to reach $143 billion this year and top $200 billion by 2028, and Intel is on track to claim a substantial chunk of that revenue in the long run.
Shares of Intel are still down nearly 50% from their pandemic-era high, and they trade right around 2017 levels. But the company’s growth potential today dwarfs its growth potential 6 years ago. While Intel faces more competition in its core markets, the company’s foundry business could easily generate tens of billions of dollars in annual revenue down the road.
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Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
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