Semiconductor manufacturer Intel (INTC -3.05%) was asleep at the wheel as rival Advanced Micro Devices (AMD -5.04%) rose from the dead. AMD's products were terrible from 2011 through 2017, built on a failed architecture that came nowhere close to competing with Intel. But that changed in 2017 with the launch of AMD's Zen-based processors. AMD is now on the fourth generation of Zen, and its chips have surpassed Intel on essentially every metric.

It's clear that Intel underestimated the threat AMD posed. Chronic manufacturing problems for Intel, the rapid progress of third-party foundries like Taiwan Semiconductor (TSM -5.10%), and better product designs from AMD converged to propel AMD back into a competitive position in the CPU market. It wasn't long ago that Intel had seemingly insurmountable architecture and manufacturing leads over AMD. Now it has neither.

A semiconductor chip.

Image source: Getty Images.

Betting big on manufacturing

This may sound like an argument against buying Intel stock. There are certainly plenty of reasons to stay away from the lumbering chip giant. But Intel, led by new CEO Pat Gelsinger, has made some bold decisions that have set the stage for an epic comeback.

Earlier this year, an activist hedge fund called on Intel to spin off its manufacturing business. Given Intel's struggles on the manufacturing front, this didn't seem like that bad of an idea on the surface. Getting out of manufacturing would allow Intel to focus solely on chip design, outsourcing the extremely expensive business of making bleeding-edge chips to third parties. Both AMD and IBM have done exactly that in the past 12 years.

Contract manufacturer TSMC plans to spend $100 billion over the next three years on capital expenditures. Samsung plans to dump $151 billion through 2030 on non-memory chip manufacturing. The cost of entry into the world of leading-edge chip manufacturing is astronomical. It would cost Intel a fortune to regain its manufacturing lead.

The easy thing for Intel to do would be to get out of manufacturing. Under Gelsinger, Intel is doing the opposite. Not only will the company keep making its own chips, but it's serious about making chips for other companies as well. Intel wants to be a major player in the foundry market, offering U.S.-based manufacturing capacity at a time when the semiconductor industry depends heavily on TSMC.

Executing Gelsinger's strategy won't be cheap. In March, Intel announced a $20 billion investment in two new fabs in Arizona to support its own products and its new foundry business. The company also plans to pour as much as $95 billion into new facilities in Europe over the next decade, and reports in July suggested that Intel was in serious talks to acquire GlobalFoundries for around $30 billion.

"There will be consolidation in the industry. That trend will continue, and I expect that we're going to be a consolidator," Gelsinger said in an interview in August with the Wall Street Journal.

It's time to buy Intel stock

There's a global shortage of semiconductor manufacturing capacity, and it could last for years. TSMC's share of the contract manufacturing market is around 60%, and the company has become incredibly profitable. TSMC generated around $4.8 billion of net income in the second quarter alone.

I think it's a reasonable bet that this situation isn't sustainable. It seems fragile given where relations are between the U.S. and China. I think U.S. and European semiconductor manufacturing capacity is going to be valuable in the coming years, and Intel is in the best position to offer it. Intel may even manage to snag some government subsidies to help fund new factories.

It will take years for Intel's plan to become a leading foundry to play out. Profits will come under pressure as the company ramps up its spending. But the opportunity is enormous. The foundry industry generated $85 billion of revenue in 2020, and that number will almost certainly rise as an increasing number of products and devices contain an increasing number of chips.

A successful foundry business will help Intel justify the massive spending needed to keep up with the likes of TSMC. That will benefit its own chip business, where it's looking to win back some of the market share it's lost to AMD.

Intel's forward price-to-earnings ratio sits at about 11, so Intel stock is certainly a bargain based on current earnings. But the reason to invest in Intel is its future potential. It won't be a quick process, but Intel's bottom line has the potential to soar as Gelsinger remakes the company.