The global chip shortage has sent shockwaves through the technology sector, exposing deep-seated vulnerabilities in the complex semiconductor sector’s supply chain. However, one industry giant is seizing an opportunity for a strategic reset. Intel Corporation (NASDAQ: INTC), a pioneer in the semiconductor industry known for its expertise in designing and manufacturing its own chips, is embarking on a strategic shift by venturing into the foundry business.

With Intel Foundry Services (IFS), the company now aims to produce chips for other companies, directly challenging established players like Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM) and Samsung Electronics (OTCMKTS: SSNLF).

Intel's Shift: From IDM to Foundry Player

Intel's decision to embrace the foundry model stems from multiple factors. The global chip shortage underscores the urgent need for increased manufacturing capacity, and Intel, with its substantial resources, can help address this bottleneck. Additionally, diversification opens up new revenue streams, lowering Intel's reliance on just its internal chip demand. Finally, increased competition in the foundry space gives Intel an opening to leverage its technological prowess and regain a leadership position it has struggled to maintain in recent years.

Notable early adopters of Intel Foundry Services include major players like Qualcomm (NASDAQ: QCOM), Amazon Web Services (NASDAQ: AMZN) and MediaTek (OTCMKTS: MDTKF). These partnerships signal a degree of confidence in Intel's ability to deliver cutting-edge manufacturing solutions to external clients.

The Technological Race: Intel's Manufacturing Roadmap

Intel's foundry turnaround hinges on its aggressive process technology roadmap. Recent setbacks spurred the company to outline a series of upcoming process nodes named Intel 7, Intel 4, Intel 3, Intel 20A and Intel 18A. With a clear goal in mind, the company aims to reclaim its former glory as the unrivaled leader in process technology. Their mission is to develop chips that not only outperform the competition but also excel in terms of power efficiency.

A pivotal element in this strategy is the adoption of Extreme Ultraviolet Lithography (EUV). This complex and costly new technology enables the creation of significantly smaller, denser and more powerful chips. Intel's successful large-scale implementation of EUV will be a critical factor in achieving its ambitious performance goals while also lowering manufacturing costs compared to older, less advanced process nodes.

Beyond simply shrinking the size of individual transistors, Intel is also prioritizing cutting-edge packaging technologies. Solutions like Foveros and EMIB allow the company to combine multiple silicon 'chiplets,' potentially manufactured on different process nodes, into a single, integrated package. This flexible approach can offer Intel performance advantages over competitors with less modular chip designs. Additionally, it provides the potential to reduce costs and time-to-market through the reuse and flexible integration of proven silicon building blocks.

Financial Implications: Decoding the Turnaround

Intel's newfound emphasis on transparency has included creating the 'internal foundry model.' This accounting change segments Intel's manufacturing operations and product development groups financially, revealing the true cost burdens hindering the company's overall profitability. Shockingly, Intel Foundry operated at a staggering -37% operating margin in 2023.

While Intel acknowledges the existence of challenges, it goes a step past identification by offering a comprehensive solution. The company is targeting a remarkable improvement in Intel Foundry's operating margin, aiming to reach approximately 30% by 2030. This turnaround will be heavily reliant on the success of its technological roadmap. Regaining process leadership, along with increased operational efficiency, economies of scale and rigorous cost control, will be essential to achieving its profitability ambitions.

The stock market has reacted negatively to the company’s long-term vision, causing Intel’s stock to drop over 20%. Investors and Intel’s analyst community seem to be focusing on the time horizon rather than the potential reward. Due to the recent underwhelming performance of the foundry division, analysts are questioning whether Intel's stock should be sold or if the company’s new strategy surrounding transparency is a silver lining. Analysts are drawing parallels between Intel's current situation and the launch of Advanced Micro Devices (NASDAQ: AMD) Zen architecture a few years ago. In the case of AMD, initial technological advancements laid the groundwork for considerable long-term financial success.

Obstacles and Outlook: Intel's Foundry Gauntlet

Intel's path is full of challenges and potential landmines. The foundry market is notoriously competitive, with established players possessing robust customer relationships and proven track records of delivering chips on time. Regaining trust after past delays and convincing major companies to switch foundries will be an uphill battle.

Furthermore, the global geopolitical landscape and potential government subsidies add further complexity. Competition for funding and favorable legislation could reshape the semiconductor industry in the coming years, impacting Intel's competitive position relative to its rivals.

Intel's entrance into the foundry business represents a monumental shift for the company. The potential is enormous increased revenue, regaining market share and a return to technological leadership, which could propel Intel to new heights. The success of Intel's foundry gamble depends on flawlessly executing its technical roadmap, controlling costs and winning the hearts and minds of customers in a fiercely competitive market. Only time will tell if Intel can rise to the challenge and transform itself into a foundry powerhouse.

The article "Intel's Long Game: Investing in the Foundry of the Future" first appeared on MarketBeat.