Intel (INTC 0.46%) has great aspirations for its third-party foundry service (a chip-manufacturing business that makes chips designed by other companies). Intel's plans will bring it into closer competition with what is far and away the world's largest foundry service, Taiwan Semiconductor Manufacturing (TSM 0.96%), or TSMC for short.
That's why it might come as a surprise that Intel is reportedly using TSMC to manufacture its next-gen GPUs (graphics processing units), according to Taiwan's Commercial Times newspaper. If this winds up being true, is this bad news for Intel, and great news for TSMC? The answer is a bit more nuanced.
TSMC books a "big" order from Intel?
Let's address the elephant in the room, TSMC. The company already commands over half of the world's chip foundry market, thanks to its technical abilities as well as its impressive customer service. Once a clear-cut leader emerges in an industry, it's incredibly difficult for competitors to dislodge it. No surprise, then, that TSMC keeps scooping up new business, even from would-be rivals.
But is earning Intel's business a coup, especially with Intel working so hard to retool its own manufacturing prowess? Not really. After all, TSMC is the manufacturer of Intel's current generation of discrete GPUs (a stand-alone system, versus a graphics processor integrated into a CPU), the Arc Alchemist GPUs for video gaming and professional visualization.
Intel must be finding it cost effective to continue using TSMC for its consumer-facing GPUs, because its next-gen units (code-named Battlemage, slated for release the second half of 2024, and Celestial, in 2026) will also use TSMC fabs.
But to call this a big win for TSMC would be a stretch. Intel GPUs are small potatoes (more on that in a moment), so booking new GPU business for a couple of years down the road won't move the needle.
It's widely accepted that Apple is TSMC's biggest customer, accounting for over 20% of the foundry's sales. Other top customers include MediaTek, AMD, Qualcomm, and Nvidia, to name a few. Intel likely accounts for a minimal -- one could even argue insignificant -- amount of TSMC's annual revenue.
Why Intel's strategy makes sense
While TSMC getting more Intel business is another feather in its cap, this isn't exactly bad news for Intel. In fact, this could be a good move for the chip company.
Intel is a late entrant to the discrete GPU space, offering consumers a third choice versus market-leader Nvidia and scrappy AMD. But even though Intel's latest Arc series GPUs have been a solid option (especially with the heavy discounting creating attractive price-to-performance for video gamers), they haven't exactly been a runaway success.
Intel's Accelerated Computing Systems and Graphics business brought in just $837 million in revenue in 2022, or a paltry 1.3% of total sales. And the unit generated an operating loss of $1.7 billion. Yikes!
So why bother with this cash-bleeding segment at all? Indeed, there were rumors late in 2022 that Intel could axe its floundering consumer GPU business, though this later report out of Taiwan seems to indicate Intel has come too far with its development of the Battlemage and Celestial chips to turn back now.
Intel's GPU unit lost lots of cash in 2022 (no doubt partly because of the discounting), but it still expanded revenue 8% year over year. That's in contrast to declines at market leader Nvidia. Intel has said it sees demand in the coming years for an affordable GPU, so as the market for gaming PCs improves, the Accelerated Computing Systems and Graphics segment could win over customers, and perhaps flip to a profit at some point.
In the meantime, Intel can keep the bulk of its business (its PC, laptop, and data center processors, as well as its third-party foundry aspirations) focused on executing a turnaround, while the tried-and-true TSMC handles manufacturing of the tiny GPU business.
I'm not buying Intel stock at this point, especially not because of its bet on video gaming GPUs. For now, I see plenty of other well-established companies generating growth and profitability, with stocks trading at attractive valuations (like TSMC, for example). Nevertheless, keep a close eye on Intel stock in 2023 as the company begins to lay the groundwork for a possible turnaround.
