2 Companies Intel Corp. Should Target With Custom Foundry Efforts

By Markets Fool.com

Image source: Intel.

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Ever since current Intel (NASDAQ: INTC) CEO Brian Krzanich took the helm back in 2013, it's been crystal clear that the chipmaker is very interested in building out a significant contract chip manufacturing business. Indeed, at the company's 2013 investor meeting, Krzanich showed a slide that said that Intel aimed to "open foundry to any company able to utilize our leading-edge silicon."

Since then, Intel has announced a handful of contract chip manufacturing deals, ranging from programmable-logic vendor Altera to mobile processor specialist Spreadtrum.

Once the products developed as part of these agreements begin shipping, the company might finally be able to report significant revenue from its custom foundry efforts.

Nevertheless, the deals Intel has announced so far represent reasonable first steps, but for contract chip manufacturing to become a significant business for the chipmaker, it's going to have to aim for more substantial deals.

Let's look at two companies with whom Intel should aggressively pursue contract chip manufacturing deals.

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Augmenting its gaming business

One of the portions of Intel's personal-computer processor business that has done very well even in the face of a weak overall personal computer market is gaming. Gaming is one of the few "killer applications" that benefits from Intel's state-of-the-art microprocessors.

As important as fast processors are to this market, specialized graphics processors, also known as GPUs, are even more critical to this market.

It would be very difficult for Intel to participate in this market with an organically developed solution, and I don't think acquiring a successful gaming graphics processor vendor outright would be the way Intel would want to attack this.

However, striking a deal as a contract manufacturer for NVIDIA (NASDAQ: NVDA), the most successful vendor of standalone graphics processors, particularly for gaming, could be a nice way to gain more content in this market.

NVIDIA's relationship with contract chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is quite deep so it would likely be difficult for Intel to convince NVIDIA to switch over some of its products, particularly the high-value gaming-oriented chips. Nevertheless, if Intel could win a high-volume SKU or two over at NVIDIA, that could be a nice win for the former.

The king in Cupertino

If there is a contract chip win that would generate buzz for Intel in mobile, it'd be Apple's (NASDAQ: AAPL). Apple ships a couple of hundred million high-end smartphone and tablet applications processors each year, which means that there are billions of dollars in potential revenue to be had from serving as a contract manufacturer for these Apple-designed processors.

Historically, Samsung and TSMC have built chips for Apple, with Samsung serving as the exclusive manufacturer of the A-series chips through the A7 and splitting the A9 with TSMC, while TSMC exclusively manufactured the A8 and the most recently launched A10.

Although Apple is widely known for its demanding commercial terms when it comes to suppliers, it also seems to really prioritize having best-in-class manufacturing technologies to allow their best-in-class chip designs to shine.

Intel has demonstrated clear leadership in high-performance PC and server parts, but its mobile processors never were anything spectacular. So if Intel's technology here is really as great as it tells investors it is, then it might be able to strike a deal with Apple -- at the very least as a second source to TSMC with a minority allocation of a future A-series chips.

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Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.