Intel's Foundry Services Gain Momentum: A Turning Point for the Chipmaker

Intel's Foundry Finally Has Some Good News. Has the Chipmaker Learned Its Lesson? | The Motley Fool

Intel's (INTC -1.91%) stock price collapse at the start of August on news out of its earnings report wasn't a big surprise. The chipmaker had fallen behind after years of operating a money-losing foundry business, while fabless rivals, like Advanced Micro Devices, have gained market share. Intel has long dominated the PC processor business, but a cultural aversion to risk-taking prevented the company from extending that leading position into other areas. It missed the mobile transition and now seems to be falling behind in artificial intelligence (AI). The company even lost Apple as a customer for its Macs after Apple experienced several years of frustration with Intel's chip quality and the pace of its development. Apple also saw an opportunity to improve its battery life and switched to using Taiwan Semiconductor Manufacturing (TSMC) as its manufacturing partner because TSMC could make smaller chips. Intel also passed up potentially game-changing opportunities, including a chance to invest in OpenAI back in 2017. Intel was in talks to take a 15% stake in the company for $1 billion. But then-CEO Bob Swan said he was skeptical that generative AI models would make it to market soon enough to repay Intel's investment and didn't close the deal. It was just the kind of short-sightedness and poor judgment that has plagued the company these past few years. Similarly, SoftBank, the Japanese mega-investor that's funded everything from Uber Technologies to Arm Holdings, held talks with Intel about making an AI chip that would compete with Nvidia. Those talks broke down after Intel couldn't meet Softbank's requirements. That, again, is evidence of a familiar pattern of Intel's products not meeting standards. The Intel bulls have been a bit desperate for some good news to counter all the negativity for some time now. They recently got some in the form of two new announcements about Intel's foundry division. The news sparked a 9.2% jump in the stock price over two days (Sept. 16-17). Is this the start of a rebound, or is it just a blip? Let's take a closer look. After-hours on Monday, Intel announced an expanded partnership with Amazon (AMZN -0.14%), saying the two companies would co-invest in a multiyear, multibillion-dollar program for Intel's foundry to produce custom chips, including an AI fabric chip, on its upcoming 18A (18 angstrom) process. Additionally, Intel will make a Xeon 6 chip for compute-intensive AI workloads. Investors should understand that this isn't a new relationship. Amazon and Intel have worked together since 2006, so this is an expansion of an existing relationship. However, the announcement is significant because it shows a vote of confidence in Intel's foundry business from a major customer right when Intel desperately needs one. It's unclear how much the expansion would be worth to Intel. The work will take place in Ohio, where Intel plans to build a new semiconductor manufacturing plant, and Amazon said it will invest $7.8 billion to expand its data center operations. The Amazon news followed an announcement earlier that day that Intel had been awarded $3 billion in direct funding from the CHIPS Act for the Secure Enclave program, which is run by the U.S. Defense Department. Intel said the move reflects "continued progress" at its foundry, even as it's losing billions of dollars a year in manufacturing chips. The manufacturing arm, however, is vital to government interests, as the federal government prefers to work with an American company that will manufacture its chips on U.S. soil. This funding is separate from the earlier announcement that Intel would receive $8.5 billion from the CHIPS Act for manufacturing. As Intel restructures its business and plays catch-up in the AI era, the most important question for the company is whether it has learned from its mistakes. Can it embrace risk-taking and a culture that values bold thinking instead of just toeing the company line? Last month, the resignation of director Lip-Bu Tan, one of the only directors with any technical expertise in semiconductors, rattled investors as news outlets reported that Tan had grown frustrated with Intel's bloated workforce, use of contract manufacturing, and risk-averse and bureaucratic culture. That move offers the latest evidence that the culture still needs an overhaul, and that will take time. For investors, the two announcements this week are positive steps, but it will take more than that to put the company back on track. The good news is that the stock has finally risen enough that there's even talk of a turnaround, but the business will likely take years to recover if it can reinvent itself. Recency bias is probably giving the stock an exaggerated boost as the company still faces a lot of challenges. Still, turning the foundry business around is key. If Intel touts more achievements like the ones above, investors should see the stock continue to move higher.

Intel's strategic transition: can new orders and cost cuts lead to a rebound?

Many still regard Intel as one of the greatest American companies. However, recent struggles have led to a less flattering label: "too big to fail." The critical question now is whether Intel can see a glimmer of hope amid news of new orders and ongoing efforts to cut costs by US$10 billion, including a significant reduction of 15,000 employees from its global workforce and real-estate exits. Intel's recent announcement of a strategic alliance with Amazon Web Services (AWS), along with US$3 billion in funding from the CHIPS and Science Act for the Secure Enclave program, underscores the robust support Intel receives from both the government and the private sector. "The Board and I agreed that we have a lot of work ahead to drive greater efficiency, improve our profitability, and enhance our market competitiveness," stated Intel CEO Pat Gelsinger in a message to employees. With a historic dominance in the CPU market -- maintaining a 76% global market share as of the first quarter of 2024 -- it is challenging to envision such a giant stumbling. Yet, persistent financial challenges have plagued its operations and led to stagnant sales growth. A recent 10-Q report filed on August 2 revealed that Intel's Client Computing Group experienced a 19% revenue growth in the first half of 2024, while areas like Data Center and AI, Network, and Edge showed little change. Although Intel Foundry's sales did rise slightly in the second quarter, overall sales for the first half of the year decreased by 3%. The IFS includes certain third-party foundry services and assembly and test revenues from external customers, according to the report. Taking a closer look, recent figures indicate a concerning trend: external customers are moving away from Intel Foundry Services (IFS). Sales contributions from these external parties dropped by more than 30% in the second quarter and the first half of this year compared to the same period last year while losses widened. IFS' external sales are disappointing, with its losses easily consuming the hard-earned profits from other divisions. Source: Intel 10-Q report, compiled by Judy Lin, September 2024. Intel faces stiff competition from Qualcomm, a newcomer in the AI PC market, and the pressure is intensifying in the X86 architecture landscape. However, the challenge of IFS is greater than anything else. Gelsinger has made extra efforts to maintain employee confidence in IFS, emphasizing the importance of building momentum as the company approaches the launch of Intel 18A. He highlighted the need for greater capital efficiency within this division while also focusing on creating a more competitive cost structure to achieve the US$10 billion savings target. Additionally, Gelsinger stressed the importance of refocusing on the strength of the X86 franchise in driving Intel's AI strategy. The effectiveness of this pep talk remains to be seen. While there are promises of increased independence for Intel Foundry as it transitions to a subsidiary, some analysts argue that this step may not be sufficient. "The CEO does not look like intending to spin off or sell the foundry business in the short term. We will continue to watch for indications of whether the company will reduce its stake in its foundry subsidiary when it might consider an IPO or spin-off, and how it plans to manage its capital expenditure-to-sales ratio and equipment depreciation, as GlobalFoundries has done," noted Andrew Lu, a senior semiconductor industry analyst in Taiwan. He added that any reduction in Intel's exposure to fabrication could bring positive news for the company. As Intel continues to navigate these challenges and capitalize on new opportunities, the path ahead will require agility, innovation, and strategic partnerships to reclaim its position as a leader in the semiconductor industry.

Intel stock rises from the ashes amidst bold business decisions

Intel has taken dramatic steps to restructure its operations, breathing new life into Intel stock price. In the wake of a 7% increase in Intel stock, CEO Pat Gelsinger has outlined a series of ambitious changes aimed at reviving the company's fortunes and positioning it for future success. The focal point of this transformation is the establishment of Intel Foundry as an independent subsidiary, marking a significant milestone in Intel's quest to regain its dominance in the semiconductor industry. Intel's decision to spin off its foundry business into an independent subsidiary is central to its strategy. Announced by Gelsinger earlier this week, the foundry business will have its own operating board and separate financial reporting. The move is intended to give the foundry division the autonomy it needs to attract outside capital, focus on efficiency, and better serve customers. Historically, Intel has struggled to compete with other semiconductor manufacturers, but the hope is that greater independence will allow the foundry business to operate more flexibly and competitively in the market. By giving Intel Foundry its own leadership and financial structure, the company is signaling a willingness to make hard choices in order to win back customers and investors. One such customer is Amazon's cloud services division, AWS, which has recently inked a multibillion-dollar deal with Intel Foundry for the production of custom artificial intelligence (AI) chips, as Reuters reports. Securing Amazon as a customer is a major vote of confidence and could be the catalyst Intel needs to rebuild its reputation in the semiconductor space. While Intel celebrates its new deal with Amazon, the company is simultaneously making painful decisions elsewhere. In an effort to streamline operations and cut costs, Intel announced plans to halt work on new chip factories in Germany and Poland for the next two years. These projects, which were originally conceived as part of a broader expansion strategy, have been postponed due to market conditions and expected demand. Instead, Intel will concentrate its manufacturing efforts on facilities in Arizona, Oregon, New Mexico, and Ohio, where it believes the return on investment will be stronger. Moreover, Intel has revealed plans to significantly reduce its real estate footprint, cutting up to two-thirds of its global properties. This downsizing reflects Intel's recognition of the need for leaner operations as it contends with rising competition and falling profitability. Intel is betting big on its 18A chipmaking process, a cutting-edge technology designed to produce faster, more efficient chips for AI and data center applications. While initial testing of the 18A process has encountered difficulties, particularly in collaboration with Broadcom, Intel remains confident that it will be a game changer in the industry. Intel reveals its AI roadmap with Lunar Lake at Computex 2024 In addition to its deal with Amazon, Intel has also secured Microsoft as a partner for its 18A process, further boosting optimism around the company's AI capabilities. AI chip production is quickly becoming a battleground for semiconductor manufacturers, and Intel is determined to remain at the forefront of this competition. With cloud giants like Amazon and Microsoft now on board, Intel's AI ambitions appear to be on solid footing. Despite the promising developments in AI and foundry independence, Intel is still grappling with significant financial losses. In the first quarter of 2024, the company reported a staggering $1.6 billion in total losses, with its chipmaking division alone accounting for $7 billion in operating losses throughout 2023. These figures have put intense pressure on Gelsinger to implement sweeping changes and drive greater profitability. In response, the company has launched a comprehensive cost-cutting campaign that includes Intel layoffs affecting 15,000 employees worldwide. Gelsinger has described this period as the most significant transformation in Intel's history, comparing it to the company's transition from memory chips to microprocessors in the 1980s. Intel's comeback effort has not gone unnoticed by the U.S. government. The company was recently awarded up to $3 billion in direct funding through the CHIPS and Science Act, a federal initiative aimed at boosting domestic chip production for critical industries, including the U.S. military. The funding will play a crucial role in Intel's plans to expand its manufacturing capabilities in the United States, further reinforcing its commitment to regaining leadership in the global semiconductor market. The Intel stock price chart reveals a steady, gradual climb over the past several days, culminating in a significant surge towards the end of the period, closing at 20.92. This consistent upward movement reflects the market's growing confidence in Intel's recent strategic decisions, particularly CEO Pat Gelsinger's bold move to spin off the Intel Foundry as an independent subsidiary. Intel stock has been under pressure due to its financial struggles, including billions in losses and significant restructuring efforts. However, the announcement of Intel Foundry's independence, along with securing Amazon's cloud division as a key client for its advanced AI chips, has renewed optimism. The chart clearly indicates that investors are reacting positively to these developments, as seen in the smooth yet solid upward trajectory starting mid-period, reflecting growing investor confidence in Intel's turnaround plan. Additionally, the chart displays several minor fluctuations, reflecting typical market volatility and investor caution. These smaller dips were likely influenced by Intel's announcement to pause construction on its chip factories in Europe and real estate cutbacks. Yet, despite these temporary setbacks, the current Intel stock price shows a consistent recovery, which aligns with Intel's broader efforts to prioritize its U.S.-based manufacturing plants and its shift towards AI-focused chipmaking. The sharp rise near the end of the chart can be attributed to two major factors: Intel's ambitious restructuring plans and the boost in market sentiment following Intel's new AI chip deal with Amazon's AWS. This surge signals that investors are confident that Intel's strategic decisions will reverse its recent financial losses and drive future growth. Intel's stock surge of 7% in the wake of these announcements signals that investors are cautiously optimistic about the company's future. The decision to spin off Intel Foundry as an independent entity, secure major AI contracts, and scale back non-essential projects demonstrates a clear vision for revitalizing Intel's operations. However, the company is still navigating financial turbulence, and much will depend on how well these bold initiatives are executed in the months and years ahead. With the semiconductor industry more competitive than ever, Intel faces a challenging road to recovery. Yet under Gelsinger's leadership, the company appears to be making the right moves to rise from the ashes and reclaim its place among the top chipmakers in the world.

Intel, once a Silicon Valley star, has been floundering. Now it's mounting a turnaround.

This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Have an account? Log in. It's a mantra that Intel appears ready to revive after sliding into crisis. Pat Gelsinger, who has led Intel as CEO since 2021, has enacted a sweeping set of new initiatives to turn the chip company around. Several challenges around production and strategy have left it far short of its historic heights -- and those reached by rivals. While Nvidia has added around $1.6 trillion to its value since January, and TSMC, another rival, has risen almost 60% this year, Intel has gone the other way. It was worth over $210 billion at the start of the year but has now fallen to less than $90 billion. As quarterly financial earnings this year have shown, it has struggled to capitalize on the generative AI boom. Its Gaudi 3 AI chip, unveiled as a rival to offerings from Nvidia and AMD, is expected to generate just $500 million in sales this year. Revenue last quarter was down from the same period the previous year. Last month, the company announced more bad news: It would lay off 15,000 people from its workforce, suspend its dividend from the fourth quarter, and cut its capital spending. The changes led to the company's shares falling by over 25%. It's a low point for a company whose cofounder, Gordon Moore, revolutionized the computing field through industry-defining observations, now formulated in Moore's Law. However, Gelsinger seems ready to ensure the 56-year-old company can revive its fortunes. After months of seeing Intel's shares tumble, Gelsinger on Monday addressed the elephant in the room by announcing the "next phase of Intel's transformation." "There has been no shortage of rumors and speculation about the company, including last week's board of directors meeting, so I'm writing today to provide some updates and outline what comes next," Gelsinger wrote in a letter to employees. One of the headline updates he shared was that Intel is expanding its collaboration with Amazon Web Services through a "multi-year, multibillion-dollar framework" that would see the two companies work together on custom chip designs. Specifically, Intel Foundry, the division responsible for manufacturing chips instead of designing them, would produce the chip through a new process called Intel 18A that the company has been preparing to roll out in 2025. For Patrick Moorhead, founder and chief analyst at advisory firm Moor Insights & Strategy, the development is a step in the right direction. Moorhead wrote on X that the Amazon news "can only be looked at as a positive," as it gives Intel "a strategic deal it didn't have before." Meanwhile, Alvin Nguyen, senior analyst at Forrester, told Business Insider that this is a big public win for Intel. "Producing chips for a hyperscaler utilising their top processes provides publicity, a revenue stream, and validation of their foundry business," he said. Gelsinger's second headline announcement was that the company is establishing Intel Foundry as a separate subsidiary within Intel, with its own new operating board and independent directors. It's a move that aims to bring about a key financial benefit. "Importantly, it also gives us future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation," he said. The final headline announcement was that the company was set to "pause" on projects to build new plants in Poland and Germany for around two years in a bid to become more capital-efficient. Critically, Gelsinger told employees that "there are no changes" to Intel's other manufacturing locations as it remains committed to manufacturing investments across locations in the US, such as Arizona, Oregon, New Mexico, and Ohio. For now, investors seem to have taken the shake-up positively. Intel's share price was up over 6% in pre-market trading on Tuesday. Forrester's Nguyen said the announcements go "a long way to improving their outlook.". However, he added that challenges remain, "especially with their workforce reduction and concerns about the AI market." One of the company's biggest problems has been its struggle to capitalize on the generative AI boom. According to a Reuters report last month, the company passed over an opportunity to invest in ChatGPT maker OpenAI seven years ago. That set it well behind rivals once large language models finally arrived in a big way just a few years later. Analysts have also noted positive aspects of Gelsinger's turnaround plan. A research note from Bernstein, published on Tuesday, said, "the moves suggest Intel is not as desperate for cash as some have feared." However, the research firm's note added that "nothing announced was really incremental, or changes the current situation."

Intel Held Days of Pivotal Meetings to Create a Plan to Turn Things Around: 'No Shortage of Rumors and Speculation'

A month after reporting a $1.6 billion net loss, announcing layoffs that affected 15,000 people, and stating that it wants to reduce costs by $10 billion, Intel has a plan to turn things around. Intel CEO Pat Gelsinger wrote in a Monday message to employees that Intel will be taking concrete steps to become profitable and competitive. The letter arrived after Gelsinger met with Intel's board last week for three days to figure out a path forward. "There has been no shortage of rumors and speculation about the company, including last week's Board of Directors meeting, so I'm writing today to provide some updates and outline what comes next," Gelsinger wrote. The first change is making Intel Foundry, Intel's chipmaking business, a subsidiary and separating it from the rest of the company. Related: 'Tough Day For All of Us:' Intel CEO Announces Layoffs Affecting 15,000 People The move will allow Intel Foundry to be more independent, have separate funding sources, and report earnings on its own outside of Intel's larger organization. Intel additionally plans to cut the real estate it holds by two-thirds by the end of the year and sell part of its stake in semiconductor company Altera to cut costs. Intel is also focusing on AI strategy and announced a partnership with Amazon Web Services to develop new AI chips. Intel shares jumped 8% on Monday after the news. "All eyes will remain on us," Gelsinger wrote in the letter. "We need to fight for every inch and execute better than ever before. Because that's the only way to quiet our critics and deliver the results we know we're capable of achieving." Related: How Nvidia CEO Jensen Huang Transformed a Graphics Card Company Into an AI Giant: 'One of the Most Remarkable Business Pivots in History' Intel faces rising competition from the likes of Nvidia, which has pushed it out of the graphics cards space. Intel's GPU market share went from 4% in the first quarter of 2023 to effectively 0% in the first quarter of 2024. Bloomberg analysts predict that Intel will make $52 billion in revenue this year, or 70% of what it brought in two years ago. They say Intel lost ground by not being able to capitalize quickly on the AI boom.