Credit Suisse tells James Covello he's wrong....and provides numbers
“To date IFS has remained mostly a niche effort, but we would argue that as Intel’s manufacturing lead continues to widen at 14nm and especially at 450mm, IFS will become a more meaningful driver of top and bottom line performance,” he writes. “Investors worry about the impact to corporate profitability from foundry business, especially relative to an Intel and Apple relationship. On the surface, Intel’s MPU ASPs of $120 versus the Apple ASP of $20-$25, Intel’s corporate gross margin of 60-65% versus TSMC’s at 45-50% and Intel’s cost/wafer of $10,500-$11,500 versus leading edge wafers at TSMC at $5,000-$5,500 would all suggest that any entry into foundry would be margin dilutive with little bottom line impact.”
But he adds: “We disagree.”
Pitzer writes that he looked at the impact of a foundry relationship between Intel and Apple using ARM chips ”and concludes that the profitability profile is much better than the consensus view.”
His view: If Intel were to produce 100% of Apple’s demand at 14 nm the company generate an extra $5.8 billion in revenue, 47% gross margins (which is below the 60%-65% of the core business) but with operating margins of 35%, above the core of 28%-32%. He thinks that arrangement would produce an extra 28 cents a share in annual profits, with an ROI of 20%-25%.