Increased Competition In The Consumer And Commercial CPU Markets Will Impact Top Line Growth

Struggling in the Data Center Market: Xeon SP CPUs Losing Ground As AMD Steps Up

Intel's dominance in the data center CPU market has been a significant pillar of its success over the years, contributing around 30% to the company’s total sales.

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However, recent trends suggest a concerning shift. The Xeon Scalable Performance (SP) CPUs, once a flagship product for Intel in this segment, have seen declining sales. This decline is not just a reflection of market saturation but an indication of competitors like AMD making significant inroads. AMD's EPYC CPUs have been lauded for their performance, offering up to 4x more performance per watt compared to Intel’s Xeon processors. 

This efficiency is crucial for data centers, which prioritize power consumption and performance. The equation here for customers is simple. If AMD CPUs can offer similar performance for much less power consumption, then they can cut operating expenditure by switching to AMD. Intel's premium pricing strategy, which was once justified by its superior products, is now being questioned as competitors offer similar or better performance at competitive prices.

Stiff Competition and Innovation From AMD and ARM Could See Intel Lose Vital Market Share

The consumer CPU market, a segment where Intel enjoyed significant market share, is now rife with challenges. AMD's Ryzen series has not only matched Intel's offerings but, in some cases, surpassed them in terms of performance and price. 

PassMark: Price to Performance ratio for the CPU Mark benchmark on single CPU systems

The competition is now beginning to extend beyond the traditional Intel VS AMD battle, with ARM beginning to make a name for itself with architecture that differs from the traditional x86 used by Intel. ARM's energy-efficient architecture, which has been adopted by tech giants like Apple for its Mac lineup, could pose a significant threat in the future.

Intel's delay in transitioning to smaller nanometer processes, a key factor in CPU performance and efficiency, has further eroded its competitive edge. While Intel has been able to keep up by extracting every ounce of performance out of older processes, there could be a point where their slow adoption could manifest itself as them falling far behind the likes of AMD. 

Recent data has highlighted that Intel has conceded sub-single-digit percentage points of market share across three major categories. This loss is indicative of the escalating competition from rivals like AMD and ARM, further aggravated by Intel's delay in transitioning to smaller nanometer processes. As consumers become more tech-savvy and demand better performance, Intel's challenges in this segment could lead to a shrinking market share - potentially worsened if laptop OEMs like HP, Dell and Acer begin preferring AMD or ARM CPUs for their laptops (the market where Intel is by far the strongest).

Intel’s Lag In GPU Innovation Could See Them Fall Behind In The Uptake Of AI

Intel's belated entry into the discrete graphics processing unit (GPU) market and its struggle to match the innovation pace of Nvidia and AMD has not only meant that it will struggle to gain ground in the consumer GPU market, but it also potentially hinders its position in the AI sector.

GPUs are central to AI processing, and with the consumer GPU market being absolutely dominated by Nvidia - and to a lesser extent AMD - Intel's lag in GPU innovation could lead to a significant setback as AI begins to take off. 

While a distinction must be made between consumer GPUs (which are primarily used for gaming or small scale workstation work) and Data Center GPUs (the ones that AI models like ChatGPT run on and the primary driver in Nvidia’s journey to a trillion dollar company), it can be said that the two segments are have a mutually beneficial relationship. Developments in gaming have led to new pathways being explored in GPU architecture, which has benefitted the Data Centre market.

Intel’s entrance into the GPU market with the Arc series was initially met with skepticism from the tech community. While Intel’s Arc GPUs actually offer some incredible hardware for the price, their software implementation and driver support left some things to be desired.

In the benchmarks below from Puget Systems, you can see this exact scenario play out. In some workloads, the Intel Arc GPUs are able to compete with much more expensive hardware.

But in other applications, their software and driver shortcomings mean they fall well behind competitors.

So while Intel actually has the hardware, their position in the market might have them playing a perpetual game of catch up rather than actually competing and stealing meaningful market share from Nvidia and AMD. Ultimately, this could result in them “missing the bus” on the AI revolution as they focus their R&D on joining the club, rather than setting themselves apart from their competitors.

Client Computing Growth To Slow As AMD Catches Up In The Notebook Segment

In the consumer CPU market, I expect that Intel will face market share and margin pressures due to increased competition. I believe that AMD’s more energy efficient CPUs will see them gain significant ground on Intel in the Notebook segment, which has continuously been Intel’s best performing market.

Intel’s Client Computing segment has seen a noticeable dip in revenues due to factors various factors like high inventory levels and macro-economic pressures slowing consumer expenditure. I anticipate these things will begin to slowly resolve themselves over the next 2 years, but Intel will still continue to struggle in a tightly fought battle against competitors. On the balance of these factors and the continual growth in computing devices and new GPU segment, I forecast a 5% annual growth in revenues over the next five years for the Client Computing segment, resulting in $34.78 Billion in revenues for 2028 (based off of $27.26 Billion in revenue for the last 12 months).

Inefficient Xeon CPUs And A Shift To AI Will See Intel Lose Ground In The Data Center Market

I believe Intel will face some notable challenges in the data center market over the next few years. Naturally as data becomes more plentiful and more companies need data center space, operational costs will begin to climb, and so I could see companies shifting away from using Intel Xeon CPUs, turning to more efficient AMD processors which will be cheaper to run.

To further complicate things, as commercial AI utilization ramps up, GPU expenditure will become a more important focus for data center customers. I believe that much of the capital allocated towards data center hardware will be for GPUs, leading to fewer CPU sales in the segment.

Ultimately, I envision this segment of the business to essentially stagnate over the next 5 years, culminating in only 2.5% annual growth over the years from 2023 to 2028. This would result in $18.27 Billion in revenue for 2028.

All Other Segments To Perform Quite Well Due To Strong Network And Edge Performance

Intel’s business is quite diverse and accounts for, including Network and Edge, Mobileye (which IPOed but I shall include here seeing as Intel control 88% and I will assume to remain this way until 2028), Intel Foundry Services and various other smaller ventures. I believe these parts of the business will grow quite well over the next 5 years.

While I haven’t gone into detail on these parts of the business, I will operate off a linear 8.5% growth rate in revenue for the remaining parts of the business over the next 5 years. This figure is derived from the 5 year compound annual growth rate to EOY 2021, with a 40% uplift to account for rapid growth in the Network and Edge segment. This will result in $16.0 Billion in revenue come 2028.

Shares Outstanding To Decrease Over The Next 5 Years

Over the last 15 years, Intel were authorized to repurchase up to $110.0 billion in shares and as of July 1st 2023, $7.2 billion remains available for future buybacks. However, I believe Intel’s increased R&D costs and intermittent profitability will mean that this is put on hold for the next few years.

Intel currently have 4.196 Billion shares outstanding on a fully diluted basis, up 2.3% from the same quarter last year. While I believe this rate of dilution will continue, I will account for some buybacks closer to 2028. For valuation purposes, I will assume that Intel’s shares outstanding will increase by 1% per annum to 2028, resulting in 4.41 Billion total shares outstanding.

Price To Sales Will Be The Preferred Valuation Metric Due To Short-Term Earnings Instability

Given Intel’s recent dip back into being loss-making and consensus forecasts for the next 12 months predicting another loss-making period, I am electing to value Intel on a Price-to-Sales basis.

Strategic Acquisitions Could Help Intel Catch Up And Overtake

Intel could make strategic acquisitions to bolster its position in key markets - particularly with respect to AI and data center hardware, potentially altering its growth trajectory.

Intel’s R&D Expenditure Could Be Fruitful

Intel's vast R&D capabilities could lead to breakthrough innovations that change the narrative. While they’re arguably behind some of their biggest competitors like ARM and AMD when it comes to CPU efficiency, Intel far outspends these companies when it comes to research and development.

Global Market Dynamics

Geopolitical tensions, trade dynamics, and global supply chain challenges could impact all players in the semiconductor industry, potentially leveling the playing field.