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Intel Corporation Could Add More Foundry Customers Post Altera Deal

 February 27, 2013 10:39 AM
 


(By Mani) Intel Corporation has a high volume foundry customer in Altera Corporation , which announced that it would manufacture future FPGAs on Intel's 14-nanometer (nm) tri-gate process with initial shipments in 2014.

A field-programmable gate array (FPGA) is an integrated circuit that can be programmed after manufacturing. Instead of being restricted to any predetermined hardware function, an FPGA allows the end customer to program product features and functions, adapt to new standards, and reconfigure hardware for specific applications even after the product has been installed in the field—hence the name "field-programmable".

The latest deal could be a game-changer for Intel and could position the chip giant to add more foundry customers in the future as it becomes the primary supplier of high performance logic where cost is less of a concern.

[Related -Intel Corporation (INTC) and 5 Other Stocks That Could Pop on Earnings This Week]

These next-generation products, which target ultra high-performance systems for military, wireline communications, cloud networking, and compute and storage applications will enable breakthrough levels of performance and power efficiencies not otherwise possible.

Intel has been transitioning to 22-nm process from 32-nm. Now, the 14-nm is a more advanced manufacturing process and is in the development stage. The move indicates the company's strategy shift and increasing focus on foundry business, which has been in the back burner as Intel predominantly made its own chips rather than making them for others.

"We view this announcement as significant because it is a 3rd party validation of Intel's manufacturing leadership," Deutsche Bank analyst Ross Seymore wrote in a note to clients.

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Although FPGA volumes are relatively small compared to GPUs and application processors, they demand the highest performance and drive much higher revenue per wafer.

This announcement represents a significant departure for Altera and access to Intel's process technology will give the company a significant first mover advantage. This process technology advantage should help Intel make gains in foundry services and perhaps more significantly in mobile devices.

"The company (Intel) has long maintained its process technology leadership would translate to success in the market, and this is the first point of proof," Seymore noted.

Moreover, the deal would help Intel to diversify its revenue stream and may offset lower revenue from PC chips as the PC sales are weak due to demand shift to smartphones and tablets.

In addition, valuation gap for Intel with foundry should narrow with the latest deal and initial revenue will come in 2015, while the strategic benefits to Altera and Intel should become clearer in 2013.

"We note the leading foundry trades at ~6x sales compared to Intel at less than 2x sales. The foundry trades at a premium despite lower GM and higher capital intensity," the analyst added

Meanwhile, Altera will gain a competitive advantage as the only major FPGA company with access to this technology and validates Intel's process leadership. Altera along with rival Xilinx, Inc. (NASDAQ: XLNX) are the current FPGA market leaders by holding more than 70 percent of the market.

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