Intel Foundry Services: America’s TSMC (Part 3)

Update: Intel jumps to 17-month high after Mizuho analyst upgrade

This is the Intel Part 3 report. Click the following links for Part 1, Part 2, our Semiconductor Industry Primer, and our thoughts on NVIDIA’s recent news.

This could be what $INTC’s stock chart looks like in 2050

Update: Intel jumps to 17-month high after Mizuho analyst upgrade | Yahoo Finance

As we’ve discussed in the preceding Intel Part 1 report, Intel is planning to open up its internal foundry to other fabless companies (e.g. Apple, Meta, Nvidia) as an external foundry. This is akin to replicating TSMC on American shores — making it similar to Lockheed Martin in strategic significance to both the US and European governments. Its is also why I refer to Intel IFS as the “Lockheed Martin of Tomorrow”.

In this Intel Part 2 report, we’ll be doing a deep-dive into IFS. There are 2 main topics that we will be covering here:

Chapters:

1. The Unassailable Moats & Wonderful Business Economics of Leading-Edge Fabs (e.g. TSMC)

2. The US-China macro thesis behind IFS which provides an airtight justification for asymmetric risk:reward existing in Intel’s current valuation

When Intel IFS finally picks up full steam, it will likely resemble an American version of TSMC to a large degree. Yes, there is reason to believe that it may underperform TSMC and Samsung Foundry going forward — but as we shall see in the next section, there is more than enough risk:reward asymmetry here when:

1. Global semiconductor industry TAM is growing at breakneck speed of 12% CAGR;

2. There are only three leading-edge fabs on Earth (Intel, TSMC, Samsung) — and the barriers-to-entry of this industry are sky high;

3. Intel’s shares are currently trading at 7.5x normalized PE (based on FY18-21 earnings of ~$20B)

There’s ample room here to make the argument that IFS alone can justify INTC 0.00%↑’s entire Group valuation of 7.5x norm. PE. Antonio Linares of the fantastic Investment Ideas newsletter even calls the sector developments surrounding IFS “one hell of a tailwind for Intel”. We shall explore why in this report.

The analogy I would draw to INTC 0.00%↑ today would be Buffett’s acquisition of Apple in 2016. When Buffett started acquiring his Apple stake in 2016 at just 8.8x PE, it pretty much represented the point of maximum pessimism for Apple — at the time it could do no right, and nothing was ever good enough. Given the similarly shaped clouds hanging over Intel, it’s not entirely impossible to imagine INTC 0.00%↑ being in the same position today.

Keep in mind that while IFS is indeed going to be a wonderful business, it is by far not the most attractive part of the INTC 0.00%↑ thesis. Rather, that would actually be the massively hyper-depressed undervaluation of Intel today — which reflects 7.5x normalized PE even before any contributions from IFS, much less together with it post-2025. Think about what that means once you include IFS’s future contribution — I could be totally wrong about my Intel thesis here, double my estimated valuation… and it still wouldn’t even hit 10x normalized PE!

That is how massively undervalued INTC 0.00%↑ is today — I would even argue for its valuation (not its business per se) to possibly be at the point of maximum pessimism. Caught your curiosity? Sign up for a free trial below to find out more!

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. — George Soros

Check out our previous Intel articles: