Intel's Recent Deal With ASML Was Necessary

| About: Intel Corporation (INTC)

Intel's (NASDAQ:INTC) deal to take a 15% equity stake in ASML Holdings (NASDAQ:ASML), as well as provide the firm with $1 billion in R&D funding for next-generation EUV and 450mm wafer tools, has been widely talked about. But I believe that a lot of investors are simply unsure of how this deal will affect Intel. I believe that this move was necessary for Intel and the semiconductor industry on a broader scale.

In a Small World, EUV Is a Big Deal

ASML provides the optical imaging tools for semiconductor manufacturing. Essentially, to create a semiconductor device, one starts with a circular slice of very pure silicon with a light-sensitive film on its surface. A device called a "photographic aligner" aligns the wafer to what is called a "photomask," an opaque plate with holes in it to allow light to come through in a specified pattern.

The buzzword one usually hears involving the Intel/ASML deal is "EUV lithography," which stands for extreme-ultraviolet lithography. Intel currently uses 193nm immersion lithography and, due to broad industry ingenuity, such tools have been extended to 32nm, 28nm, 22nm, and, according to Intel, its 14nm process nodes. But as feature sizes become even smaller, using 193nm immersion lithography will become problematic, and the move to EUV radiation in the range of 10-14nm will be necessary.

To understand this R&D funding, it's important to note that Intel's process technology lead over competitors is fairly large, meaning that the company will run into the limits of current tools far sooner than its peers. So it's absolutely vital for Intel to have cutting-edge EUV tools available for when the company needs them. Given the technical challenges present with EUV, it is not surprising that Intel is more than happy to give ASML a financial push as soon as it can.

By investing in ASML to get EUV tools ready more quickly, Intel is making an investment in its process technology lead, which should help to maintain high gross margins (by having smaller chips than its competitors) and strong competitive positioning (more cores, higher frequencies, and more integrated features).

What About 450mm?

The investment in 450mm wafers (the current semiconductor wafer standard is 300mm) is purely a long-term cost-reduction play. The larger the wafers, the more semiconductor chips that can be produced per-wafer, thereby improving gross margins.

Conclusion

In short, Intel is making an investment that is ultimately necessary. It is ahead of the curve, so it needs to make sure that the tools necessary for it to maintain its lead are available. Furthermore, by investing in 450mm, the company will see cost savings down the road that will, in time, more than pay for the initial investment.

Disclosure: I am long INTC.