Is This the First Sign of Intel Making Apple Chips?


Intel is off to a great start this week. After beating the Dow Jones Industrial Average on Monday, the chip giant made another market-beating leap today. Intel shares are up 2.8% as of 1:50 p.m. EST, making it the second-best performer on the Dow today. The move contributed just three of the 105 points the blue-chip index has gained today, thanks to Intel's modest share price. But every little bit helps, right?

Yesterday, Intel's catalyst was an impressive mobile-products presentation over the weekend. This time, we're looking at a whole new strategy to milk value out of Intel's manufacturing muscle.

Programmable-processor veteran Altera has tapped Intel to manufacture some of its next-generation chips. The companies didn't make it clear how large this order might be, but Altera is a large operation with $1.8 billion in trailing sales. This contract has the potential to make a significant addition to Intel's revenue streams -- not a huge one, but one that will be hard to ignore.

But that's not the point today!
More importantly, letting other chip designers into Intel's cutting-edge factories adds a new wrinkle to the company's entire operating model. It may sound like a no-brainer when demand for traditional PC and server chips is falling, but these manufacturing lines are seen as a major competitive advantage. Don't expect Intel to let just any riff-raff through the door, but a select handful of companies that don't compete directly with Intel's core products makes plenty of sense -- and it's hard to find a company that fits the bill better than Altera.

This is actually not Intel's first foray into foundry operations -- it's just by far the largest one. Privately held chip-designer Achronix signed up to use Intel's chip-making know-how two years ago. "If an audacious plan to convert Intel into the next Taiwan Semiconductor is the World Series, this partnership is minor-league batting practice," I said at the time. The Altera deal is more like an early regular-season game, where the teams test each other out and the postseason remains far off.

That being said, Taiwan Semi has taken a 2.6% haircut today, just about mirroring Intel's gains. Altera is a well-known Taiwan Semi customer, so Intel is stealing some business, but not enough of it to explain these big market moves. Investors on both sides of the equation expect Intel to move further into the foundry industry if this experiment works out.

The real game-changer?
Above all, Apple 's desire to stop relying on head-to-head rival Samsung to make its mobile silicon brains is the worst-kept secret in Silicon Valley. Samsung's Galaxy line of tablets and smartphones poses a serious threat to Apple's iPhones and iPads, but all of Cupertino's central processors are made in Sammy's factories. So Apple depends on Samsung's expertise while also battling the Korean company in court and the open market. Look up "frenemy" in the dictionary, and you'll see an Apple logo with "Samsung" written all over it.

The very definition of a strained relationship.

Intel has long been seen as a natural replacement, and the Altera deal just opened the door a little wider to such an arrangement. An Apple contract would most definitely move Intel's revenue needle in ways that Altera can't.

That's the kind of speculation that can move two $100 billion stocks by nearly 3% in one day. Add Intel to your Foolish watchlist if you're at all interested in semiconductor stocks or in Apple's future partnerships. Intel's new strategy could get really interesting in a hurry.

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