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Intel Gains on Factory Investment Plan in Major Chip Market Challenge

Intel said late Tuesday that it will invest $20 billion in two Arizona-based factories in a major push to take on Asia-based chipmaking rivals TSMC and Samsung.

Intel  (INTC)  shares traded higher Wednesday after the chipmaker said it would invest $20 billion to build two new factories in Arizona as it takes on Samsung and Taiwan Semi undefined in the global semiconductor market

The bold challenge to the chipmaking giants could see Intel emerge as both a designer and manufacturer and next-generation computer and smartphone chips while also developing a new business -- thanks in part to a development partnership with IBM  (IBM)  -- that allows other companies to use its Arizona hub to make their own semiconductors. 

Intel's costs could also be softened by spending from the CHIPS Act legislation that is currently making its way through Congress. 

New CEO Pat Gelsinger, who is attempting to breath new life into the struggling tech group following a dismal 2020, said the group will pursue new customers such as Apple  (AAPL)  once the plants -- often referred to as fabs and foundries -- are up-and-running. Advanced Micro Devices  (AMD)  and Qualcomm  (QCOM)  are also potential clients for the Intel foundry, analysts said, with Credit Suisse suggesting the total addressable market could be as much as $200 billion. 

“We are setting a course for a new era of innovation and product leadership at Intel,” Gelsinger said. “We’re going to be leaders in the market and we’re going to satisfy the new foundry customers, because the world needs more semiconductors and we’re going to step into that gap in a powerful and meaningful way.”

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Intel shares were marked 1.3% higher in early trading Wednesday to change hands at $64.20 each. Its key European supplier ASML NV  (ASML) , surged 5.4% in Amsterdam while rivals TSMC and Samsung fell 3% and 1% in Taiwan and Seoul respectively.

Intel's investment and expansion plans offset a weaker-than-expected forecast for full-year profits, which it sees at $4.55 per share, and total revenues, which are forecast at $72 billion. Gelsinger cited the global shorts in semiconductor supply chains and reasons for the weaker full-year guidance. 

It also marks the second major attempt to enter the foundry business -- Gelsinger called previous attempts "somewhat half-hearted" -- following a failed effort that was launched in 2016.

"While Intel failed in its initial foundry effort a few years back, we view its manufacturing footprint and expertise as a key competitive advantage; if the company can leverage this into a successful foundry service, we think it could provide a significant source of growth," said KeyBanc Capital Markets analyst Weston Twigg. "This time around, the company is investing heavily in new foundry capacity ahead of customer demand (it announced two new fabs in Arizona, with additional U.S. and European announcements expected later this year), and the foundry business will be a discrete business unit."

"We believe there is very high demand for foundry services, especially in the U.S. and Europe, where Inetl will focus, and we think there is a good possibility of success this time around," he added.