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Intel Corp. Doesn't Seem That Serious About Its Contract Chip Building Business

For years, microprocessor giant Intel (NASDAQ: INTC) has been working to try to offer its manufacturing skills, which it applies primarily to its own internally designed products, to third parties.

Most chip companies today do not own their own chip manufacturing plants and therefore rely on third parties to build their designs.

Image source: Intel.

Though Intel seems to be getting more vocal about its ambitions here -- company executives went over them in depth during the company's Technology and Manufacturing days hosted in March and in September -- a new piece of evidence seems to suggest that the chip giant doesn't expect this business to be significant in the years ahead.

The Oregonian recently got hold of some internal Intel documents in which the company details its strategy to roughly double its earnings per share and market value by 2021. In that document, Intel provides the following valuation targets for each of its business units:

  • Data center -- $120 billion
  • Client (PC and mobile) -- $100 billion
  • Internet of Things -- $50 billion
  • Memory -- $25 billion
  • Programmable chips -- $15 billion

Nowhere in this breakdown does Intel provide a valuation for Intel Custom Foundry, the company's contract chip manufacturing business unit.

What's going on, then?

Two options

The first possibility is that, based on Intel's view of the marketplace and its discussions with potential customers, the company doesn't see itself gaining much traction in the world of contract chip manufacturing. This is reasonable considering the limited success that Intel has seen here and the increasing chip manufacturing capabilities of its competition.

However, given that Intel keeps talking up its opportunities here, there's another option: Intel intends to apply revenue from each contract chip manufacturing win to the Intel business unit that most closely matches the market that the product is targeted at. So, for example, if Intel goes on to win its rumored bid to manufacture Huawei's future mobile applications processors, Intel wouldn't report that revenue as a separate line item called Intel Custom Foundry, but would instead roll those sales figures in with its Client Computing Group business. If Intel Custom Foundry ever starts generating serious revenue, that revenue will be recognized in the latter way.

Still not looking optimistic

Intel has indicated that the two major areas Intel Custom Foundry is targeting are networking infrastructure and mobile devices. Revenue from any such wins -- if I'm right in my analysis of how Intel plans to recognize revenue from them -- would apply to either its Client Computing Group business or its Data Center Group business.

Note that in the revenue growth assumptions Intel reportedly gave in this internal document called for a 1% annual decline in Client revenue from 2016 through 2021 and 10% annual revenue growth in its data center business. These growth figures are consistent with the organic growth expectations that Intel has given in the past for those businesses, which seems to suggest that the chip giant isn't banking on Intel Custom Foundry to contribute meaningfully to its financial performance.

In other words: If you're banking on Intel becoming a major player in the contract chip manufacturing business to fuel its growth, you might want to ratchet down your expectations.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.