Intel's (INTC 2.14%) new CEO isn't wasting any time in making the changes he thinks are necessary to turn things around at the one-time leader in semiconductor technology. Intel reported its second-quarter earnings results in late July, but Lip-Bu Tan's public memo, published at the same time as the release, drew most of the attention of investors.
The CEO, who took over the position in March, laid out several strategic initiatives designed to turn around Intel's financial position. And considering Intel's importance in the semiconductor industry, they have the potential to reverberate across multiple companies.
In fact, it's great news for one of the most dominant forces in the industry, while another major player could see even greater uncertainty in its future. Here's why.
Image source: Intel.
The most important announcement in Intel's news release
While Intel beat revenue expectations for the second quarter, that was completely overshadowed by Tan's plans to make Intel "a more financially disciplined foundry." The foundry business (that's the business of actually making the physical chips) generated $4.4 billion in revenue last quarter, up 3% year over year.
But the vast majority of that $4.4 billion in revenue stems from intersegment services (i.e., printing and packaging Intel's own chips for sale). Just a minuscule $22 million came from making chips for other semiconductor companies, and that's down from $39 million in the same quarter a year ago.
Over the past decade, Intel's foundry capabilities have fallen behind those of its biggest competitor, Taiwan Semiconductor Manufacturing (TSM -0.13%). As a result, in the risks section of its 10-Q, the company says, "We have been unsuccessful to date in attracting significant customers to our external foundry business."
That's why Tan says Intel needs a big change. "There are no more blank checks," he wrote regarding investing in foundry equipment. Instead, the focus is on ramping up Intel's newest node exclusively for in-house chips. A node shrinks the size of the transistors printed on the chip, enabling faster and more power-efficient chips by packing more transistors per square millimeter of silicon.
Intel's newest node is called 18A, denoting a node size of 18 angstrom (1/10,000 of a millimeter). Note that the size has mostly become marketing for incremental node shrinkage. Then there's Intel's next-generation node, 14A, which will only move forward if Intel receives customer commitments first.
That represents a huge shift in strategy for Intel as it could withdraw altogether from leading-edge semiconductor manufacturing in the not-too-distant future. That would cede the most profitable segment of the market to its competitors, and Intel would become one of their customers for its most advanced chips. That could have some serious repercussions throughout the industry.
Bad news for one of Intel's suppliers
Tan's decision to pull back on spending for the foundry means equipment manufacturers may be losing a big customer. One of the companies that would be hit hardest is ASML Holding (ASML 0.65%). It makes cutting-edge lithography machines required for the most advanced chipmaking processes.
When ASML released its second-quarter earnings, management tempered growth expectations for 2026. "We continue to see increasing uncertainty driven by macro-economic and geopolitical developments. Therefore, while we still prepare for growth in 2026, we cannot confirm it at this stage," management wrote.
With Intel's earnings release, we now have more details on why ASML isn't so confident in its future. Intel's 14A process is heavily reliant on the capabilities of ASML's tools. Its latest high numerical aperture (NA) extreme ultraviolet (EUV) lithography machine reportedly costs $400 million. Intel represented a significant buyer for ASML, but that's now a much more questionable source of revenue.
Losing business from one of its biggest customers is certainly bad news for the stock. But there are no viable substitutes for ASML's machines. Losing Intel as a customer would sting, but other foundries may pick up the slack over time as demand for leading-edge chips doesn't appear to be slowing down anytime soon. At a price of around 25 times forward earnings, the market may be giving investors an opportunity to buy ASML stock at a fair value on the setback.
The biggest winner from Intel's shift
As Intel pulls back on capital spending for its foundry and focuses on finding a significant customer for its 14A node, one of its biggest competitors stands to expand its lead. Taiwan Semiconductor Manufacturing (TSM -0.13%), or TSMC, is planning to increase its capital expenditures (capex) by about 34% this year to reach $40 billion at the midpoint of its guidance.
TSMC continues to invest with expectations for future growth. It's not waiting around to ensure demand before it spends, but management is still fairly disciplined when it comes to forecasting demand. It's seen strong early results from its N2 process, and it already has customers lined up. Its A16 process is progressing quickly as well.
Management expects fast adoption from artificial intelligence (AI) customers for its A16 process due to the power-efficiency improvements it offers over the current nodes.
With Intel pulling back on its foundry spending, TSMC's lead in both technology and capacity may grow even wider. And if Intel fails to attract a significant customer for its 14A process, it plans to discontinue investing in it entirely. That opens the door for TSMC to start printing Intel's chips next decade. Intel's management even said it would become dependent on TSMC for foundry services for nodes beyond 18A if it fails to advance 14A in its 10-Q.
For now, Intel is ceding the market for leading-edge chips to TSMC. That should support very strong revenue growth for the Taiwanese company over the next few years, as it ramps up its 2-nanometer process and finalizes the 16-angstrom process. Considering the stock currently trades around 25 times earnings expectations, and many analysts could revise those expectations higher with the potential for it to add more of Intel's business, it looks like a great opportunity for investors right now.
