Chip giant Intel (INTC -9.20%) has been facing a series of problems that have heavily weighed on the stock over the past few years. First and foremost, the company lost its manufacturing advantage to TSMC. Chronic delays and missteps coupled with steady progress from the Taiwan-based foundry have put Intel in a position that would have been unthinkable 10 years ago.
Intel's manufacturing troubles opened the door for rival Advanced Micro Devices to steal share in both the PC and server chip markets. AMD has been shipping solid products, but a key component of its comeback has been its access to industry-leading manufacturing technology from TSMC.
If that wasn't enough, the PC industry remains in a deep downturn. Following a pandemic-era boom, global PC shipments tumbled 16.5% in 2022 and are on track for another decline this year. The PC supply chain has been drowning in excess inventories, reducing orders for Intel's chips. Things got so bad that Intel reported its largest quarterly loss ever in the first quarter of 2023 as revenue fell off a cliff.
While Intel's financial results remain severely depressed, investors have warmed back up to the stock this year. Shares of Intel have soared about 44% year-to-date, trouncing the S&P 500. There's a lot to like about Intel's long-term story, and the stock still looks like a great deal for long-term investors.
Winning in manufacturing
Intel's future depends on the company getting its manufacturing operations back on track. Under CEO Pat Gelsinger, Intel has embarked on an expensive journey to compete directly with third-party foundries like TSMC while also working to reclaim share in its core PC and server CPU markets. Intel's plan involves launching five process nodes in a four-year span with the goal of leapfrogging TSMC by the end of that roadmap.
So far, so good. Intel is set to launch its Meteor Lake PC chips this year built on its Intel 4 process, the second node in its roadmap. Next year will bring Granite Rapids and Sierra Forest, two families of server CPUs built on the Intel 3 process. By the end of 2024, Intel plans to have the final two nodes, Intel 20A and Intel 18A, ready for production. It's Intel 18A that should outclass TSMC, if all goes according to plan.
Regaining its manufacturing edge is important for two reasons. First, it eliminates the advantage AMD currently holds by using TSMC's advanced manufacturing technology. Second, it allows Intel to win foundry customers who need the best process node available. Smartphone chips like those powering Apple's devices and AI accelerators are all fair game.
Intel has made notable progress, even though Intel 18A won't generate meaningful revenue until 2025 at the earliest. The company has secured MediaTek and Ericsson as customers, and it recently received a large prepayment from an unnamed customer to secure manufacturing capacity and accelerate the buildout of Intel's facilities in Arizona.
Intel is also going after foundry customers who need mature, cost-effective process nodes for simpler chips. The company has partnered with Tower Semiconductor to provide manufacturing capacity and foundry services for that company's 65nm chips, and it's gained support from the major third-party chip design tool providers for its mature Intel 16 process.
None of this will bear fruit for a couple of years, but the long-term opportunity is enormous. The foundry services market is expected to grow to more than $200 billion by 2028.
A buy-and-hold stock
Intel's story will play out over multiple years. The company is so far on track to launch its process nodes on time. In fact, Intel 18A is actually ahead of schedule. The game-changing process node was originally slated for a 2025 arrival.
Although there's still time for something to go wrong, it appears that Intel's manufacturing woes are behind it. The large prepayment for Intel 18A capacity is a sign that at least one large customer has become convinced that Intel will deliver on its promises.
It's impossible to put a value on Intel stock. The company's current earnings are depressed, and the foundry business has the potential to deliver enormous upside over the long run. As it stands today, TSMC has a market capitalization nearly triple that of Intel. As Intel builds up its foundry business, that gap will likely close.
Intel still has a lot of work to do to cross the finish line on its manufacturing roadmap and win over foundry customers. The fact that Intel competes directly with companies that are big spenders on foundry services, including AMD and Nvidia, complicates the picture. But if Intel can make its foundry business work, the stock should deliver great returns for long-term investors.
