Intel (INTC) stock drops 6% after chip manufacturing plan update.

On June 21, during the trading session, Intel (NASDAQ: INTC) stock fell by 6%, closing at $32.90, as the company announced a major turnaround plan to become a chip manufacturing giant and compete with Taiwan Semiconductor Manufacturing Company.

Intel’s Chief Financial Officer, David Zinsner, explained that the company would soon change the way it reports its financial results while giving details about its foundry business and its own profit-loss statement, thereby revealing the company’s manufacturing plans.

Intel believes that this new reporting structure will help them control costs. Over the next three years, the company is planning to reduce its costs by as much as $10 trillion. As investors analyze Intel’s turnaround strategy led by CEO Pat Gelsinger, the company has provided an update on its plan, referred to as “five nodes in four years”. This strategy aims to bridge the technology gap with TSMC’s manufacturing by 2026. Intel intends to utilize its own chips to address manufacturing issues before extending access to third-party companies.

If Intel manages to catch up with TSMC, it could receive big orders for building high-performance chips from giants such as Nvidia, Apple, and Qualcomm, who don’t have their own manufacturing but rely on players like TSMC and Samsung. Intel is likely to announce a major client from its foundry business by the end of the year. Speaking to analysts, Zinsner said:

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“The manufacturing group will now face the same market dynamics as their foundry counterparts. They’ll need to compete for volume through performance and price as internal customers will have the option to leverage third-party foundries, and to attract external foundry volume, they must do the same.”

Intel’s Push for Foundry Business

During the update, Intel discussed its plans to utilize its manufacturing capabilities for its own chips. The company mentioned that further updates regarding its foundry business and partnerships with third-party customers would be provided later this year. Additionally, Intel stated that its own chip requirements would contribute approximately $20 billion in revenue to the unit in the coming year.

During the call, analysts expressed concerns about Intel’s gross margins and inquired about how this plan would help improve them. In the first quarter, Intel reported a gross margin of 38.4%, a decline of 51.3% compared to the previous year. Intel management shared their goal of achieving 60% margins.

Additionally, Intel is also planning to sell 20% of its Austrian subsidiary IMS Nanofabrication in a $4.3 billion deal to private equity firm Bain Capital. Zinsner said that “this will turn out to be one of the best acquisitions we’ve ever made, given that level of valuation and investment made.”