Intel's (INTC -2.99%) stock plunged 16% on July 24 after it followed up its second-quarter earnings beat by disclosing that its new 7nm process is now "trending approximately 12 months" behind its internal target. As a result, Intel doesn't expect to launch its 7nm chips until 2022 and 2023. During the conference call, CEO Bob Swan blamed the delay on a "defect" that caused yield degradation issues and stated Intel would rely on "contingency plans" -- including the use of third-party foundries -- to get back on track.

That was a massive setback for Intel, which still hasn't fully resolved the ongoing chip shortage caused by its troubled development of 10nm chips. But it's great news for rival AMD (AMD -3.77%), which saw its shares surge nearly 17% after Intel's disastrous announcement.

A wafer of chips being manufactured.

Image source: Getty Images.

How did Intel drop the ball?

Intel once led the CPU market with a two-year "tick-tock" cycle of upgrades. Each tick introduced a smaller node, and each tock upgraded the CPUs at the same node. Sticking to that strategy, and manufacturing its own chips at its own foundry instead of through third-party contract manufacturers like TSMC (TSM -3.18%), enabled Intel to produce "best in breed" CPUs for the PC and data center markets.

Servers in a data center.

Image source: Getty Images.

However, Intel abandoned that classic strategy four years ago, due to the rising difficulty and costs of creating smaller microprocessors. Meanwhile, AMD's CEO Lisa Su, who took the helm in late 2014, spearheaded the development of new CPUs to close the gap with Intel.

Unlike Intel, AMD placed its faith in TSMC's industry-leading foundry instead of manufacturing its own chips. TSMC launched its first 7nm chips in 2017, then started testing its second-generation 7nm+ chips in 2018 before developing a new 6nm process in 2019. AMD's latest Ryzen and Epyc CPUs are all built on TSMC's 7nm process.

In short, Intel's own foundry couldn't keep pace with TSMC and Samsung, the two leading third-party foundries manufacturing chips for fabless chip makers like AMD, NVIDIA, Apple, and Qualcomm. That failure caused Intel to drop the ball with its troubled transition from 14nm to 10nm chips, which caused the CPU shortage that handed the market to AMD -- then dropped it again by fumbling its transition from 10nm to 7nm chips.

Is Intel really falling behind AMD?

Intel's missteps strongly suggest it's falling behind the tech curve and losing the PC and data center markets to AMD. After all, Intel's share of the entire CPU market plummeted from 82.5% to 62.4% between the third quarters of 2016 and 2020, according to PassMark Software, as AMD's surged from 17.5% to 37.5%.

However, several industry reports claim Intel's 10nm chips still beat AMD's 7nm chips in terms of transistor density and overall performance. Multiple industry benchmarks found Intel's latest 10nm CPUs still beat AMD's comparable 7nm Ryzen CPUs in single-threaded performance, although AMD regains the lead in most multi-threaded tests.

Unfortunately, AMD's 7nm chips are still broadly cheaper than Intel's 10nm chips. AMD's next-gen Ryzen and Epyc chips, built on TSMC's new 7nm+ process, will also likely close the density gap with Intel's 10nm chips.

By the time Intel finally launches its 7nm chips in 2022 and 2023, TSMC will likely have advanced to 3nm chips. Therefore, if AMD keeps designing smaller chips and simply places its faith in TSMC, it could eventually replace Intel as the "best in breed" CPU maker for the PC and data center markets.

Will Intel ever get its act together?

Intel has struggled with management and execution issues for years, but the abrupt departure of CEO Brian Krzanich in 2018 and the subsequent promotion of CFO Bob Swan as his successor are clearly taking a toll on the company.

Swan didn't fully resolve Intel's 14nm chip shortage, which delayed the launch of its 10nm chips, and it already faces a new delay with its 7nm chips. If this pattern continues, Intel's struggling foundry will become a major liability and hinder its ability to compete against fabless rivals like AMD.

For now, Intel's 7nm setback should please AMD and TSMC investors. It gives AMD a massive window for additional market share gains, and it clearly suggests it's smarter for chipmakers to let TSMC do the heavy lifting instead of manufacturing their own chips with internal foundries.