One of the most difficult aspects of investing is differentiating between patience and stubbornness. Sometimes, you're wrong, but other times, you just look wrong. Recognizing the difference between the two and not panicking when everyone else seems to disagree with you can be the difference between great results and disaster.
Semiconductor giant Intel (INTC -0.69%) is going through a painful turnaround. The company is investing heavily in manufacturing and attempting to grow a foundry business from nothing into a rival to market leader TSMC. At the same time, Intel is playing catch-up in its product divisions as rival AMD puts out great products.
This was never going to be quick, easy, or cheap. On top of the challenges of rapidly bringing new manufacturing processes to production, Intel faced a brutal downturn in the PC market and data center customers prioritizing AI chips over general-purpose CPUs. The company has been forced to take drastic action to shore up its finances and get to the finish line, announcing a $10 billion cost-cutting program that includes laying off 15% of its workforce.
Intel stock crashed following that cost-cutting news, briefly dropping below $20 per share. Intel now trades below book value, a valuation that is almost unthinkably pessimistic. The company is still the market leader in PC and server CPUs, and its manufacturing assets are certainly not worthless.
For Intel shareholders, a decision needs to be made: Am I wrong, or do I just look wrong? I chose the latter and bought more shares of Intel as it plumbed multiyear lows. Here's why.
Intel can still make great products
In the past, when Intel's product divisions and manufacturing operations were deeply intertwined, delays on the manufacturing side wreaked havoc on the product side. Chronic delays in Intel's 10nm manufacturing process, a version of which was rebranded as Intel 7 and used for PC and server chips that launched as recently as 2023, made it next to impossible for Intel to keep pace with AMD.
In the server CPU business, Intel fell behind AMD badly in terms of performance and efficiency. The situation wasn't as dire in the PC CPU business, but Intel's chips have been power-hungry and are facing stability issues.
Intel is now reaching the light at the end of the tunnel. The company's recently launched Sierra Forest and Granite Rapids server CPUs moved to the company's Intel 3 manufacturing process and upped the core count considerably. Based on early reviews, Granite Rapids has closed the performance gap with AMD.
On the PC side, Intel has turned to TSMC for manufacturing. Both Lunar Lake for laptops and Arrow Lake for desktops outsource production, with the company planning to move future chips back in-house once its Intel 18A process is ready. This decision seems to be paying off. Lunar Lake laptops are delivering incredible battery life numbers, and the soon-to-be-launched Arrow Lake will likely be drastically more efficient than Intel's last-gen chips.
The bottom line: Intel's overall product lineup is the strongest it's been in years.
Intel 18A is on track
The Intel 18A process is critical for Intel. The company plans to make many of its own products using the process, and it will be the main draw for the foundry business. Intel has already secured some big-name customers, including Microsoft and Amazon.
Generating meaningful external revenue from Intel 18A, which will begin scaling up production next year, is going to take time. The good news is that the process appears to be on track. Intel disclosed last month that the defect density for Intel 18A is already at an acceptable level, an indication that yields for the process are going to be just fine.
Intel's foundry segment is currently losing billions of dollars annually on paper, but this shouldn't be a surprise. Intel has to make massive investments well ahead of revenue. Once external revenue starts rolling in, the profitability picture will begin to improve.
Intel is taking the step to split its foundry business into a subsidiary, a move that could help potential customers feel more comfortable and enable outside investment. Intel could eventually take the foundry business public as a way to raise cash, although that probably won't happen anytime soon.
Regardless of how Intel ultimately structures itself, the manufacturing investments the company has been making still look likely to pay off in the long run.
Patience is key
There's a lot of uncertainty surrounding how exactly the Intel story will play out. The company has reportedly been approached about being acquired, although that seems unlikely given antitrust concerns. Investing in Intel today is not a bet on a specific outcome. Instead, it's a bet that paying around 80% of book value for a company like Intel will work out fine eventually.
That's the bet I'm making. It'll take at least a few years to see if I'm being patient or stubborn.
