Shares of chip giant Intel (INTC -1.71%) were hammered last week, after the company disclosed some information about its new reporting structure. Historically, the company allocated manufacturing costs across its various product divisions. With Intel aiming to become a leading foundry by the end of the decade, the company has broken out manufacturing into its own business unit.
I won't mince words: The headline numbers look bad. Intel Foundry reported $18.9 billion of revenue in 2023, almost all of which was internal, and booked an operating loss of nearly $7 billion. Furthermore, Intel said it doesn't expect the foundry business to break even until 2027.
It's no wonder, then, that Intel stock sank about 13% last week.
Slowly at first, then all at once
While a $7 billion loss doesn't look great, it's important to remember that Intel is in the investment phase of its foundry buildout. The company is pouring capital into new facilities and new process technologies, and it hasn't yet recognized much revenue from any of the foundry deals it has struck with customers. Intel Foundry generated less than $1 billion of external revenue in 2023, and much of that came from traditional packaging services.
As it stands today, Intel has secured contracts worth $15 billion for its advanced packaging and wafer manufacturing services. That total includes a deal with Microsoft to manufacture an undisclosed chip on Intel's upcoming Intel 18A process. With Intel 18A set to be ready by 2025 and start ramping in volume in 2026, it will take time for that $15 billion to be converted into revenue.
Intel will likely see some additional external foundry revenue this year from its advanced packaging wins, more in 2025 driven by advanced packaging and mature process technologies, and then the floodgates begin to open in 2026 and beyond as Intel 3 and Intel 18A capacities ramp up.
By 2030, Intel expects to be the world's second-largest foundry measured by external revenue, with the foundry generating an adjusted operating margin of 30%. Based on the foundry market today, that means Intel is targeting at least $15 billion of foundry revenue annually by the end of the decade.
On the cost side, Intel can now wring out wasteful spending from its manufacturing business that would have been difficult to find when costs were spread out among other divisions. Becoming a foundry also allows Intel to extend the useful lifetimes of its process nodes as they mature.
Buy Intel stock before it's too late
Intel's market capitalization has been beaten down to around $160 billion. Based on the company's current results, the stock looks expensive. However, a rough post-pandemic PC market, market share losses in the data center, and heavy foundry investments are keeping a lid on profits.
While Intel's 2030 targets are far from a guarantee, the stock will almost certainly be worth far more by the end of the decade if the company can get close. A 30% operating margin on $15 billion of external foundry revenue yields $4.5 billion in operating profit. Intel is also targeting a 40% operating margin for the product segments, which would yield about $19 billion in operating profit based on 2023's depressed revenue. That's over $23 billion in operating profit with additional upside if Intel can grow product sales.
There's plenty that could go wrong for Intel over the next six years, and long-term targets should never be trusted implicitly. But it's not hard to see how Intel stock could soar by the end of the decade as the foundry business comes into its own.
