Unless Intel Wins Apple, Foundry Is a Waste of Time

Intel (NASDAQ: INTC  ) has been pretty loudly telegraphing its intentions to become a major, high-end semiconductor foundry player. Its highest-profile win to date has been FPGA vendor Altera, and it is presumed that the company is working to bring aboard more customers interested in the leading edge. Some investors believe that Intel's future is as a semiconductor foundry, but if you really dig deep into the numbers, there's just not enough business there to make it worth Intel's while.

How big is the market for a leading-edge foundry?
In the foundry landscape, the latest technology node is known as the 28-nanometer node. (This is actually a bit misleading as there are several flavors of 28-nanometer out there -- 28 poly silicon for cheaper, lower-performing devices, and 28 high-K/metal gate for higher-performance devices.) To get a sense of the market opportunity for a leading-edge foundry, it's worth looking at just how big the market for a 28-nanometer foundry is today.

Taiwan Semiconductor (NYSE: TSM  ) , the world's leading semiconductor foundry, saw its 28-nanometer node begin to ramp into volume by late 2011 to early 2012. Here's a look at 28-nanometer revenues at TSMC by quarter:

Metric

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

28-nanometer revenue (in millions USD)

$69

$175

$298

$609

$960

$1,060

$1,502

$1,728

$1,646

$1,673

Percentage of net revenue

2%

5%

7%

13%

22%

24%

29%

32%

34%

34%

In 2013, TSMC did roughly $6 billion in leading edge 28-nanometer revenue. If we assume that TSMC's share of 28-nanometer was about 84% in 2013 (per TSMC's own statements), this implies a leading-edge total addressable foundry market of about $7 billion. Note, however, that the second largest 28-nanometer player in 2013, Samsung, saw most of its business come from Apple, as it builds Apple's A-series processors, and the third largest player, Global Foundries, was likely mostly revenue from Intel rival Advanced Micro Devices (NYSE: AMD  ) .

This business isn't worth it without Apple
Intel is unlikely to build chips for direct PC-chip competitor AMD, nor is it likely to build chips for Qualcomm (NASDAQ: QCOM  ) , the world's leading smartphone chip vendor and by far TSMC's largest leading-edge customer, as that would eliminate Intel's biggest competitive advantage for its own processors. So we're talking about a $7 billion-per-year total market, most of which is silicon from Qualcomm, AMD, NVIDIA (NASDAQ: NVDA  ) , and Apple.

Since AMD, NVIDIA, and Qualcomm would be extremely poor strategic choices for Intel, the only real "large" customer that Intel will be able to win at the leading edge would be Apple. Even then, if we assume that Samsung gets between $10 and $15 per chip from Apple for its very leading edge, this wouldn't amount to more than $1 billion of leading-edge business per year. (Remember, not all of Apple's phones are the latest one in any given year, so the portion that is leading edge is much lower than the total Apple business.) This just isn't all that much and would be more of a strategic win (i.e., to keep that revenue out of the foundry landscape) than it would be a way to meaningfully increase revenues.

Foolish bottom line
The leading-edge foundry business is worth about $7 billion a year, which just isn't all that much to a company like Intel, which does $33 billion a year in PC chips and an additional $11 billion to $12 billion a year from server processors. The foundry business works for pure-play folks like TSMC because foundries don't need to spend a dime on actual chip development. Intel, on the other hand, is investing nearly $3 billion a year in mobile processor R&D, so taking competitor business (from Qualcomm and NVIDIA, for example) doesn't make sense, and even something like an Apple deal, which -- if Apple went long-term exclusive with Intel -- would be worth about $1.5 billion to $2 billion, with even less than that at the leading edge.

Intel is better off developing competitive mobile products and capturing much more value that way.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 11, 2014, at 9:12 PM, akaRAV55 wrote:

    Intel is already losing $3.1 BILLION per year in 2013 and over 900 million in 1st quarter 2014.

    "Intel's mobile chip division lost a hefty $3.15 billion, after posting an operating loss of $1.78 billion in 2012. In the first quarter of 2014 alone, the Mobile and Communications Group saw a $929 million operating loss on a meager $156 million in revenue, according to new financial results issued today by the company."

    http://www.theverge.com/2014/4/15/5618126/intel-is-losing-bi...

    And...

    "But what was more concerning to investors was the fact that Intel’s mobile business is still losing heaps of money, in part due to marketing costs — Intel offers manufacturers who buy its tablet chips rebates. In the first quarter, mobile losses swelled to $929 million. In 2013, Intel lost $3.15 billion in its mobile communications group, as it has tried to make inroads to compete in smartphones and tablets, where chips based on designs from ARM Holdings Plc dominate."

    http://www.marketwatch.com/story/intel-pushes-into-mobile-bu...

    And now they are dedicating an entire FAB to competing with ARM? Apple is releasing A8 for the next generation iPad and iPhone and Intel just can not compete at that level of price/perfomance/energy footprint.

    Intel is using it's very high margins in the PC and server space to subsidize this lunacy in the mobile space.

    Billions of ARM processors are sold in this market while on a few million x86 chips are sold. And those FEW Intel processors destroying any prospects of growth for Intel. Selling more with a negative margin does not create profits. Just MORE LOSSES.

    Intel is also one of the most shorted stocks on NASDAQ becasue of this idiotic obsession to compete in a space that they know nothing about.

    But we do know several certain things.; Intel is eating it's young, destroying it's growth potential and wasteing it's stockholders money and oh yeah onther thing; Ashraf is an Intel toady.

  • Report this Comment On May 11, 2014, at 11:32 PM, speculawyer wrote:

    Pffft. Intel already won Apple Computers. They are not going to win handhelds but that is a thin-margin biz.

  • Report this Comment On May 12, 2014, at 3:56 AM, akaRAV55 wrote:

    Margins are not that thin. Samsung, Qualcomm and not to mention ARMH are making a bundle!!!!

    Intel fabs cost BIG BUCKS and Intel margins can not support this misadventure into the Tablet or Mobile space.

  • Report this Comment On May 12, 2014, at 4:20 AM, akaRAV55 wrote:

    "Apple's A8 Chip Production for iPhone 6 Underway at TSMC"

    http://www.macrumors.com/2014/03/05/a8-chip-underway-tsmc/

  • Report this Comment On May 13, 2014, at 6:40 PM, H2323 wrote:

    Thin margins are the future for all chip designers, it's x86....that's Intel's issue in mobile. Ashraf knows this but plays games like a kid. The fact is that ARM is native to ALL mobile phone OS's. Intel will or is designing ARM SoCs to be a dominate player in mobile phones let alone tablets. Apple will use fabs other then Intel as long as possible for a multitude of reasons, one being Intels management mentality's and the fact that they'll have zero flexibility to use other fabs if theirs an issue. With the other players,Gloflo, TSMC, Samsung they have flexibility.

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