Semiconductor giant Intel (INTC 6.79%) has an ambitious plan to become the world's second-largest foundry by 2030. The company is in the middle of rolling out five process nodes in four years. If all goes according to plan, Intel will effectively erase the manufacturing edge that foundry leader TSMC has built up by the start of 2025.
Intel's foundry business isn't producing much revenue right now, but the company disclosed that it had secured more than $10 billion of business when it last reported results in late January. These commitments from customers, which will translate into revenue over multiple years, are for both manufacturing and advanced packaging services.
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A magnificent win
It's been about a month since Intel's disclosure that it had surpassed $10 billion of lifetime deal value for its foundry business. During the company's foundry event last week, Intel updated that figure to more than $15 billion. This boost was partly driven by a deal struck with Microsoft (MSFT 1.21%), a "Magnificant Seven" stock, to manufacture chips on Intel's upcoming Intel 18A process.
Cloud computing giants are increasingly designing and installing custom chips to support their vast infrastructures. The AI boom and the sky-high price tag attached to data center GPUs capable of training and running AI models have only increased the urgency to bring chip design in-house.
Intel and Microsoft didn't disclose much about the chips destined for the former's manufacturing lines. Microsoft CEO Satya Nadella said: "...we need a reliable supply of the most advanced, high-performance, and high-quality semiconductors. That's why we are so excited to work with Intel Foundry, and why we have chosen a chip design that we plan to produce on Intel 18A process."
Microsoft did discuss some of its plans for custom chips last year at its Ignite event. The company has designed two custom chips, the first built for artificial intelligence and the second meant for general-purpose compute workloads on Microsoft's cloud platform. Both chips are expected to find their way into Microsoft's data centers early this year, so the company is likely using TSMC as a manufacturing partner. Intel 18A won't be ready until the end of 2024.
However, Microsoft's first-generation custom chips may give investors an idea of what Intel will be manufacturing for the company in 2025 and beyond. Maia 100 is Microsoft's custom AI accelerator, optimized for the company's infrastructure and workloads. While Microsoft will likely remain a big buyer of Nvidia's GPUs, the company is likely aiming to reduce its dependence on the GPU giant.
The second chip is a custom Arm-based server CPU called Cobalt 100. Microsoft is aiming for energy efficiency with this new chip by aiming to maximize performance per watt. By designing its own server CPUs, Microsoft can optimize its infrastructure to a degree that's just not possible with off-the-shelf parts.
While Intel's data center segment may lose sales to cloud giants designing their own server CPUs, the company is in a prime position to manufacture those custom Arm-based chips. Intel and Arm struck a deal last year to co-optimize the Arm architecture and the Intel 18A process.
The manufacturing deal with Intel could include second-generation versions of Microsoft's Maia or Cobalt chips, or it could be for something entirely different. Microsoft is also reportedly working on its own networking chip to reduce its reliance on Nvidia's networking products. AI servers need to pass data back and forth at high rates, so capable networking hardware is critical to squeezing the maximum performance out of AI chips.
Foundry is the future for Intel
Given the expansion of Arm-based chips into areas where Intel has historically dominated and the trend toward large tech companies designing their own chips, Intel's foundry push is coming at the perfect time. Had Intel stuck with its old model of keeping its manufacturing facilities to itself, the company's growth would have likely been stunted by rising competition.
The foundry business gives Intel the ability to benefit from this increased competition. While the company may lose market share in server and PC CPUs, the foundry opportunity is enormous. Global spending on foundry services topped $100 billion in 2022 and is expected to surpass $230 billion by 2032. It's not unthinkable that a decade from now, foundry services will be Intel's largest business by revenue.
Although financial terms weren't disclosed, the Microsoft win is a big one for Intel. If the Intel 18A process successfully overtakes TSMC technologically, Microsoft will likely be the first of many cloud giants turning to Intel for custom chip manufacturing.
