Amidst a flurry of announcements during Intel's Q4 2023 earnings call, one stood out: a partnership with United Microelectronics Corporation (UMC) to develop a 12-nanometer process platform. While presented as a simple capacity utilization strategy, this collaboration hints at a significant strategic shift for Intel. This shift, subtly implied in the remarks of CEO Pat Gelsinger and CFO David Zinsner, might just be the key to achieving the company's ambitious 60% gross margin target.

Breaking the Cycle of Moore's Law

To grasp the importance of the UMC deal, we must first revisit a "bug" in Intel's historical business model, as Pat Gelsinger put it. Intel's relentless pursuit of Moore's Law, though demonstrating its technological prowess, resulted in a cycle of constant migration to the next, smaller node just as older factories reached peak efficiency and depreciation. This left little room for maximizing returns on these depreciated assets, unlike the fabless model adopted by many competitors.

The UMC Partnership: A Strategic Shift

The UMC partnership signals a break from this cycle. By utilizing older, depreciated fabs for long-term foundry business, Intel aims to extract maximum value from its existing assets. This approach, along with a renewed focus on optimal factory capacity, creates a powerful strategy to address the cost gaps that have challenged Intel in recent years.

Portfolio Diversification and the Foundry Market

The UMC deal, together with the Tower Semiconductor partnership at the 65-nanometer node, reveals a broader portfolio diversification strategy within Intel Foundry Services (IFS). Intel is rapidly expanding its foundry offering beyond cutting-edge nodes by partnering with established players like UMC and Tower. This allows IFS to tap into the projected growth of the foundry market, estimated to reach $240 billion by 2030, while minimizing capital expenditures.

The "System Foundry" and Margin Stacking Advantage

Intel is positioning IFS as a "system foundry," emphasizing its unique capacity to meet the increasing demand for advanced packaging solutions, particularly crucial for the thriving AI market. The recent opening of Fab 9 in New Mexico, dedicated to 3D advanced packaging, underscores this commitment.

"Intel stands as the only company capable of participating in 100% of the Total Addressable Market (TAM) for AI silicon logic, leveraging both its foundry and product offerings. The surge in AI workloads, requiring both high-performance compute and advanced packaging, plays to Intel's strengths. This "margin stacking advantage," as David Zinsner calls it, allows Intel to capture margin at both the foundry and fabless product levels, a unique advantage in the industry."

Gaudi's Revenue Growth

The following chart represents Intel Gaudi's projected revenue growth based on information from the earnings call transcripts.

A Promising Future for Intel

For investors, the subtle implications of Intel's strategic shift hold promise. While the manufacturing profit and loss statement will remain under pressure in the near term, the UMC deal and the broader foundry strategy, combined with operational and financial discipline, point toward a clear path for achieving long-term financial goals. The 60% gross margin, once a distant ambition, appears attainable.

"Fun Fact: Intel's first microprocessor, the 4004, contained a mere 2,300 transistors. Today, its leading-edge processors boast billions! This journey from 2,300 to billions is a testament to Intel's continuous innovation, a journey poised to continue as the company shapes the AI era."