Elon Musk Just Shared Bad News for Intel Shareholders

Intel (NASDAQ: INTC) received a huge boost for the future of its foundry business after Elon Musk, CEO of both Space Exploration Technologies (NASDAQ: SPCX) and Tesla (NASDAQ: TSLA), shared plans for their Terafab joint venture. Intel officially joined the Terafab project the day after Musk announced his plans for end-to-end chip production in Texas. That's helped generate significant momentum in interest in Intel's foundry services over the last six months.

But Musk just confirmed that Intel's biggest rival could also play a role in the Terafab build-out. Taiwan Semiconductor Manufacturing (NYSE: TSM) could provide Terafab with a secondary source of manufacturing expertise and capacity, according to a report by Tim Culpan, which Musk confirmed. The news highlights some significant risks for Intel that investors need to consider.

Image source: The White House.

Musk needs more chips

Musk has massive aspirations for both SpaceX and Tesla, and it will require significantly more compute power than either TSMC or Intel can currently provide. SpaceX plans to launch orbital data centers within a couple of years, and Tesla plans to scale production of its humanoid robot Optimus to 1 million units per year within five years. Additionally, Tesla sees significant potential to scale auto production as its robotaxi service expands.

Musk wants to use Terafab to vertically integrate the chip production needed for the two companies' endeavors. That's important to note, as he's not trying to compete with TSMC, Intel, or any other foundries for third-party services. So, the companies have little to lose by partnering with Musk to license technology and lend their expertise.

When it looked like Intel would be the exclusive partner for Terafab, it suggested it had received a massive vote of confidence for its next-generation semiconductor manufacturing process, 14A. The partnership with Terafab would allow Intel to scale production more quickly and serve more customers with an anchor customer in hand. News of discussions between Musk and TSMC casts doubt on Intel's ability to meet Terafab's needs.

The advantages are clear for TSMC to partner with Terafab. Any agreement will likely include financial backing for the construction of new facilities in Texas. The leading chip manufacturer is reportedly considering building multiple chipmaking plants in the state, each with a price tag of at least $20 billion. That's on top of its plans to invest $265 billion in the U.S. already. Terafab would also provide a major customer, ensuring its capacity remains highly utilized.

Perhaps the biggest benefit is that it could keep Intel from making much progress against TSMC's foundry business. If TSMC wins the node for Terafab's production, Intel's foundry business will face a huge setback.

Intel's future depends heavily on finding a foundry customer

Intel's foundry business generated $5.8 billion last quarter, up 31% year over year. However, $5.5 billion of that came from Intel's chipmaking business. As central processing unit (CPU) demand has increased thanks to advancements in AI, Intel has become a much bigger customer of its own foundry services. But if Intel wants to continue manufacturing its own chips, it needs to find an outside customer.

As mentioned, Intel is seeing strong interest in its 14A process, which may have been sparked by its Terafab partnership. It's since pulled forward its 14A production timeline by about one year. It'll deliver its process design kit (PDK) 0.9 to potential customers this month, enabling them to create prototype designs based on the architecture. It'll enter risk production next year and volume production in 2028, nearly at the same time as TSMC begins production on its comparable A14 chips.

Based on both companies' estimates for performance and power-efficiency improvements over previous generations, Intel looks set to take the lead in both areas over TSMC with its next-generation production node. However, Intel Foundry CTO and operations officer Naga Chandrasekaran recently said 14A will deliver performance within 5% of TSMC's A14 production node, casting doubts on previous estimates. That comment may have pushed Terafab to reach out to TSMC.

It's still possible Intel will remain the leading manufacturing partner for Terafab, using its 14A process, while TSMC provides ancillary services or expertise. For example, TSMC is the leading advanced chip packager, accounting for about 95% of the market.

With the run-up in Intel's share price -- it's up 163% since the start of April -- and the stock now trading at 63 times forward earnings estimates, there are some high expectations built into the stock price. With the potential threat against one of its biggest catalysts, investors should think twice about buying the stock at this price.

Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Intel, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.