Intel's comeback is on track despite massive foundry losses

There are several components Intel'S (NASDAQ:INTC) turnaround story, but at its heart is the company's aggressive and costly push to compete with competitors Taiwan semiconductor manufacturing in the semiconductor foundry market. Intel has given up its once unassailable manufacturing lead through chronic delays and missteps, enabling TSMC to stay ahead, which pleases TSMC customers AMD Selling chips that outperform Intel in terms of performance and efficiency.

The process of transforming from a company that only makes chips for itself to a semiconductor foundry that also makes chips for others has been (and will continue to be) a long and tedious affair. Intel took the crucial step this year of splitting its manufacturing operations into a separate business unit with its own profit and loss statement. In the past, manufacturing costs were spread across Intel's various product segments.

Don't worry about massive losses in the foundry

Intel officially unveiled the details of its new reporting structure in April, leading to a sharp sell-off in the stock. The foundry segment was singled out for the first time and the numbers did not sit well with investors. The unit reported an operating loss of $7 billion in 2023 on revenue of $18.9 billion.

A $7 billion loss in a segment critical to Intel's future looks like a disaster, but there are some important things to know.

First, almost all of Intel's foundry revenue is currently internal, meaning it comes from the company's other segments. Although there was little external revenue in 2023, Intel still invested heavily in its manufacturing operations. The costs associated with these investments are now allocated to the foundry segment, but it will take time to recoup these investments.

Second, Intel has only just begun to operate its manufacturing operations as a separate business unit. The 2023 results are from a different era when manufacturing costs were simply spread across the rest of the company.

Intel has already achieved significant cost savings by treating the foundry's product segments like customers. The number of production costs required by product segments, which are expensive and affect production efficiency, has decreased by 95% because product segments now have to pay for them directly. Thanks to the new model, billions of dollars in annual cost savings can be achieved.

The path to profitability

For Intel's foundry segment to ultimately turn a profit, it must generate significant external revenue. The company expects the unit to break even around 2027 and operating margins to eventually reach 30%.

Intel has already signed $15 billion in foundry contracts, including wafer fabrication and advanced packaging. The company expects external revenue to exceed $15 billion by 2030, while that figure is unlikely to be reached today.

While the dramatic shift from losses to profits that Intel expects for the foundry segment may seem far-fetched, a key change in the economics of the company's manufacturing investments will help bring about this turnaround.

When Intel only made its own products, the company invested in a new process node, used it for a while, and then mostly threw it away. Under the foundry model, process nodes can be used for much longer as mature nodes are repurposed for different types of chips. The investments Intel is making today will pay off for many years to come, much longer than the investments of the past.

The foundry party for Intel really starts next year with the introduction of the Intel 18A process, but it may take until 2026 before significant capacity translates into significant revenue. According to the company, Intel 18A is on track and has already signed up a handful of customers, including Microsoft.

While the numbers make the foundry look like a train wreck right now, the $7 billion annual loss isn't particularly meaningful. For long-term investors, Intel is a turnaround stock worth buying.

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