Semiconductor factories aren’t cheap.
Building and expanding semiconductor factories, particularly those manufacturing cutting-edge chips using the latest and greatest technologies, is a capital-intensive affair. Intel (INTC 2.50%) estimates that a typical semiconductor factory takes three years to build and costs roughly $10 billion.
Intel is in the middle of a multiyear strategy shift that will transform the iconic company into a leading semiconductor foundry. Historically, Intel has used its manufacturing arm solely to make its own chips for PCs and servers. Now, the company wants to make chips for others, as well.
Intel is investing more than $100 billion in the U.S. over the next five years to expand its chipmaking capacity, plus another 50 billion euros allocated for Europe. Government subsidies, including grants and loans through the U.S. CHIPS and Science Act, will fund some of the expansions, and Intel’s capital spending is at an elevated level as it grows its manufacturing footprint.
Getting creative
On top of government subsidies, Intel is turning to private equity partners to provide a portion of the funding needed to fulfill its foundry ambitions. While bringing in outside investors reduces the upside for Intel, the cash infusion helps the company make the necessary investments without straining its balance sheet.
Intel entered into its first co-investment agreement in 2022, partnering with Brookfield Asset Management to expand its manufacturing facilities in Arizona. Under that deal, Intel would fund 51% of the project while Brookfield would fund the remaining 49%, up to a total cost of about $30 billion. Intel retained majority ownership and operational control.
Intel announced a second private equity investment during Computex this week. The company has partnered with Apollo to help fund the buildout of Fab 34 in Ireland.
Apollo will lead an investment of $11 billion to acquire a 49% equity interest in the facility, leaving Intel with majority ownership and operational control. This cash infusion allows Intel to deploy capital elsewhere while continuing the buildout of Fab 34.
Fab 34 is an important piece of Intel’s foundry strategy. The facility is mostly complete and began producing Meteor Lake processors using the Intel 4 process node last September. Granite Rapids, Intel’s upcoming server CPU built on the Intel 3 process node, is currently ramping up. Intel 3 will be a long-lived node and is currently on offer to foundry customers.
Ambitious plans
Intel’s foundry business today almost entirely serves Intel itself, with minimal revenue coming from external customers. However, the company has booked $15 billion worth of business across manufacturing and advanced packaging services, including a deal with Microsoft to manufacture custom chips.
Intel is planning to boost annual external foundry revenue beyond $15 billion by 2030, and profitability should improve dramatically as the business scales. The company is targeting a 40% gross margin and a 30% operating margin for the foundry business in the long run.
The success of the foundry business rests on Intel’s new process nodes. Intel 3 is ready now, Intel 18A will be ready early next year, and Intel 14A and Intel 10A are planned for 2026 and beyond. The company expects the 18A process to deliver process leadership over its foundry rivals, although it will take time for the company to scale up capacity.
While Intel selling a portion of Fab 34 in Ireland reduces the long-term upside for the company, maintaining a strong balance sheet is critical. This deal with Apollo allows Intel to redeploy capital to other projects, accelerating its push to become a leading semiconductor foundry.
Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Brookfield Asset Management. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.