Shares of chip giant Intel (INTC +2.93%) have been stuck in the doldrums for the past few years. The company has been losing market share to rival AMD, and its multi-year plan to become one of the world's largest foundries is still in its early stages and has yet to pay off financially. Throw in a deep downturn in the PC market that wrecked the company's profit, and it's not surprising that Intel stock has taken a beating.
While it may seem tough to be optimistic about Intel's prospects, the company has the potential to look very different five years from now.
NASDAQ: INTC
Key Data Points
The path to foundry profits
There are two things that investors need to know about Intel as it navigates a changing semiconductor industry over the next five years.
First, the company has decoupled its product businesses from its manufacturing operations. Manufacturing is now a separate entity within Intel with its own profit and loss statement, and the teams that design PC CPUs, server CPUs, and other in-house chips have some freedom to choose the manufacturing process and provider that makes the most sense.
In the past, a manufacturing delay would also mean product delays because products were tightly tethered to the manufacturing side of the business. Problems with Intel's 10nm process, which was delayed for years after a planned launch in 2016, led to delays in launching various PC and server CPUs. Manufacturing delays would trigger a cascade of product delays, eventually opening the door for AMD and its outsourced manufacturing to steal considerable market share.
Today, the product teams are more independent. The poster child for this shift is Lunar Lake, Intel's upcoming laptop CPUs that promise incredible gains in efficiency and battery life. Lunar Lake will use a 3nm process from TSMC for its main compute tile, something that would have been unthinkable five years ago.
Second, profits in the foundry business can rise quickly once the capacities of leading-edge process nodes ramp up. The foundry segment posted an operating loss of nearly $2.5 billion in the first quarter alone, but that figure is misleading. Almost all of Intel's foundry revenue right now is internal, and the company has been making massive investments in manufacturing that won't begin to pay off until the external business it's secured starts generating meaningful revenue.
Intel's plan is for the foundry segment to reach break-even sometime around 2027. By 2030, Intel expects external foundry revenue to top $15 billion with an adjusted operating margin of 30%. That works out to around $5 billion in segment operating profit.
This plan isn't farfetched. Intel's manufacturing assets will be used for much longer than in the past when the company was only making chips for itself. The Intel 18A process, which will be ready early next year, will be refined and be in use for many years as a long-lived node. The economics of Intel's manufacturing operations are undergoing a fundamental shift.
It's time to buy Intel stock
If all goes according to plan, Intel's foundry will be churning out profits five years from now, and the product businesses will have regained some of their lost market share. Even if the foundry business falters, Intel's product divisions have the option to use TSMC for manufacturing, ensuring that manufacturing issues don't cause product issues as well.
Intel is valued at just $136 billion today. The company's bottom line is currently depressed, but this valuation appears extremely pessimistic relative to Intel's potential.
Here's one way to look at it: Intel's price-to-book value, or the ratio of the market cap to assets minus liabilities, has fallen below 1.3. Meanwhile, foundry leader TSMC sports a P/B ratio that tops 8. On this basis, Intel stock is just about as cheap as it's ever been.
It will take time for Intel's strategy to play out and for its manufacturing investments to pay off. But five years from now, the odds look good that Intel stock will be trading at substantially higher levels.
