One way for Intel to boost foundry profits after losing $7 billion

Starting from the first quarter of 2024, Intel (NASDAQ: INTC) It will report its foundry business as a separate business unit. This is part of the company’s plan to grow into a major player in the foundry market by 2030. Intel’s product divisions will treat the foundries more like external suppliers, and the foundries will treat Intel’s products more like external suppliers. Product departments are like customers.

In preparation for this transition, Intel has restructured its financial statements from past years to fit the new reporting structure. It shouldn’t be too surprising that the foundry business is currently very unprofitable. Nearly all of Intel’s foundry revenue is internal, and the company has been investing heavily in new manufacturing technology and facilities while the post-pandemic collapse of the PC market sapped demand for the company’s chips.

The stock market reacted poorly to the revelation, causing Intel shares to plummet on Wednesday. Intel’s foundry unit reported an operating loss of nearly $7 billion in 2023, and the company guaranteed that the foundry unit would break even around 2027 and achieve 30% adjusted operating growth. Margins in 2030 did not dampen investor sentiment. Get better.

Why profits can grow quickly once operations begin

One thing to note is that the foundry segment has only recently begun operating as its own business unit. The $7 billion loss in 2023 is driven in part by Intel’s history of spreading manufacturing costs across its product segments.

While Intel’s restated financial statements are helpful to investors, they may not be as meaningful as a guide to future performance. In the past, product groups had little incentive to effectively leverage Intel’s manufacturing operations. In addition to the low-hanging fruit in cost, since the foundry is its own business unit, it can release efficiencies and shift to serving external customers as well as internal customers, which will extend the life of Intel’s manufacturing assets.

When Intel only made chips for itself, utilization of a given process node dropped rapidly once a new process node came online. semiconductor Foundries have grown explosively and this business model no longer works.

In foundry mode, Intel can extend the life of its process nodes, and the company will use Intel’s 3rd generation process Upcoming server CPUs, will also be available to OEM customers. The company is planning multiple revisions of Intel 3, adding new features and enhancing performance. Once the node is no longer suitable for cutting-edge products, it can still be attractive for those seeking mature, cost-effective manufacturing.

Intel will play a similar game with the Intel 18A process and the next-generation Intel 14A process, which will be ready in early 2025. Both process nodes will undergo revisions that extend their useful lives well beyond what they would be if the company only planned to produce its own wafers.

About a third of the market leaders British Semiconductorof revenue comes from 10 nanometer (nm) or earlier process nodes, and 24% of revenue still comes from 28 nanometer (nm) or earlier process nodes. (For perspective, TSMC launched its 28nm node in 2011.) Improvements have been made to these older nodes over time, but these investments made long ago will continue to pay off. Intel will look to replicate this model.

Intel’s goals are not out of reach

While some investors may find it difficult to believe that Intel can reduce its foundry business from a $7 billion annual loss to an operating margin of 30% by 2030, a shift in the way the company utilizes its manufacturing assets will serve as a strong bottom line driving force. Intel 3, Intel 18A, Intel 14A and other future nodes will generate revenue for a long time to come. The company would spend about $100 billion in the U.S. alone to build and expand manufacturing facilities if the life cycles of new process nodes were short-lived.

Once Intel’s foundry business started generating significant revenue from outside customers, the bottom line improved quickly. The company’s goals may seem ambitious, and they certainly have a lot to prove, but Intel’s goals are realistic.

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Timothy Green Holds a position in Intel. The Motley Fool owns and recommends TSMC. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short calls on May 2024 $47 calls on Intel. Motley Fool has a disclosure policy.

One way for Intel to boost foundry profits after losing $7 billion Originally published by The Motley Fool

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