Intel’s foundry ambitions are facing renewed scrutiny after the company’s stock suffered its steepest monthly decline on record in October. Shares fell 45% during the month, including a 29% drop on Friday, and declined another 8% in Monday trading, according to the information provided by FactSet.
The sell-off followed Intel’s warning that quarterly revenue would come in between $1 billion and $2 billion below analysts’ estimates. The company attributed the pressure in part to a weakening PC market, where higher costs for memory and other components are discouraging consumers from upgrading. Intel still generates roughly half of its revenue from its PC business.
The setback has increased pressure on Intel to demonstrate that its foundry operation can become a viable competitor to Taiwan Semiconductor Manufacturing Company. The company has spent roughly five years and a significant portion of its $108 billion in capital expenditure during that period pursuing the goal, but it has yet to secure a major customer for its most advanced chips. Most of its manufacturing capacity remains dedicated to Intel’s own products.
Intel’s chief executive, Lip-Bu Tan, has adopted a more cautious approach than former CEO Pat Gelsinger, limiting additional spending until customer demand is secured. Tan said on Thursday that the company expects to announce a couple of customers over the next two quarters.
Capacity constraints are making that objective more difficult. Intel said it cannot produce enough chips to meet demand because of shortages affecting wafers, substrates and memory. In response, it is reallocating some Oregon capacity away from advanced 18A wafer production toward Intel 3, an older process used for data-center products.
That decision could complicate Intel’s effort to attract customers for 18A, the process technology it is promoting to external buyers. David Yoffie, a Harvard Business School professor and former longtime Intel board member, said prospective customers may question whether Intel has enough capacity beyond its own needs to serve as a dependable supplier. He argued that failing to secure a large-scale foundry customer within a year could place additional pressure on Intel’s finances.
Intel’s data-center business offers a potential source of strength. Revenue in the division rose 78% year over year in the third quarter to $7.3 billion. Tan has also estimated that the global server-processor market could grow as much as fivefold over the next five years, reaching approximately $200 billion.
The company is producing its own 18A chips in high volumes in Arizona and is developing a second fab there. Construction has also begun at Intel’s Ohio facility, where the first structural truss was installed, although the project is nearly five years behind schedule.
Intel’s position as both a chip designer and manufacturer may give it greater control over production, according to Jordan Klein, an analyst at Mizuho Securities. However, the same structure could discourage potential foundry customers that compete with Intel in products. Yoffie said companies such as Broadcom and Qualcomm may hesitate to place manufacturing orders with a rival and suggested separating the foundry operation from Intel.
Klein said AMD is probably the only major chipmaker unlikely to use Intel’s manufacturing services because the two companies compete directly in CPUs, creating concerns about competition, secrecy and privacy.
Intel’s challenge is also tied to U.S. semiconductor supply. Yoffie said the country needs Intel to succeed because TSMC will only be able to build a limited share of its global capacity in the United States, and expanding that presence will take several years.
Sources: CNBC Markets.