Should Nvidia and AMD Investors Be Worried About Intel’s Chip Demand Warning?

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A a lot of hope is placed in Intelit is (NASDAQ:INTC) foundry services company and for good reason. It’s not only a pillar of chipzilla’s plan to regain dominance in the semiconductor industry, it’s also an important endeavor as countries around the world try to localize chip manufacturing.

But Intel has fallen on hard times and hasn’t provided a very optimistic outlook for the way forward in the immediate future. Many other chip companies like Nvidia (NASDAQ: NVDA), Advanced micro-systems (NASDAQ: AMD)and memory chip manufacturer Micron Technology (NASDAQ: MU) said some semiconductor end markets (consumer electronics like PCs and smartphones in particular) are in decline after a few years of record spending during the pandemic.

In terms of overall sales, Intel is still a titan. But does his latest warning pose problems for the growth names Nvidia and AMD?

Intel’s big competition problem

First, a brief overview of the chip industry and how it works. Intel has dominated over the decades by handling all of its own chip design, manufacturing, and distribution. Over the decades, however, some smaller chip companies began to focus on a specialty, handling either design only (known as a “fabless” chip company, essentially an engineering company) or manufacturing (known as “flea fabs”, with Semiconductor manufacturing in Taiwan (NYSE:TSM) being now by far the largest).

Meanwhile, Intel’s vertical integration operating model has steadily declined in recent years. Companies like Nvidia and AMD, which only focus their resources on design work, have edged out Intel on the technology front. And specialists like Taiwan Semiconductor have done a great job building their capabilities as trusted third-party manufacturing partners for their fabless peers. For a long time, Intel was able to hide the fact that small businesses had caught up in technology thanks to its massive scale (it’s easy for customers to keep buying more Intel chips if old Intel chips need replacing) and its high profits. margins.

But after a decade of cloud computing development, the pandemic has triggered a massive wave of IT infrastructure upgrades. Intel’s outdated hardware wasn’t ready to take advantage of the boom of the past two years, and now a cyclical downturn in consumer electronics is happening. Intel’s second-quarter 2022 revenue fell 22% year-over-year to $15.3 billion, and operating margin fell from 28% a year ago to 4.6 % in the second quarter of this year.

The outlook for 2022 is not great either. Intel expects overall revenue to decline 16% from 2021 mid-term guidance, and earnings per share to be cut in half.

A deteriorating economy can certainly be blamed for the dismal quarter and outlook. Other chip companies are also suffering. But even Intel CEO Pat Gelsinger admitted that Intel’s problems aren’t everyone’s problems.

“The sudden and rapid decline in economic activity was the main driver of the shortfall, but the second quarter also reflected our own execution issues in areas such as product design, DCAI [data center and AI group] and the AXG ramp [accelerated computing and graphics group] offerings.”

It’s a humble admission from Gelsinger, but the issues long predate his return as CEO in early 2021. See how Intel’s operating segments fared against smaller comparable segments from Nvidia and Apple. AMD over the past two years.

Period

Intel Client Computing Group Revenue

Change (YOY)

AMD Computing and Graphics Revenue

Change (YOY)

Q2 2022

$7.7

-25%

$3.9

28%

Q1 2022

$9.3

-13%

$2.8

33%

2021

$40.5

1%

$9.3

45%

2020

$40.1

8%

$6.4

37%

Data source: Intel and AMD. YOY = year after year.

Period

Intel Data Center and AI Group Revenues

Change (YOY)

Nvidia data center revenue

Change (YOY)

Q2 2022

$4.6

-16%

$3.8

61%

Q1 2022

$6.0

22%

$3.8

83%

2021

$25.8

-1%

$10.6

58%

2020

$26.1

11%

$6.7

125%

Data source: Intel and Nvidia. YOY = year after year.

Things could go wrong for everyone, but especially for Intel

The short-term outlook is not great for the entire semiconductor space that sells to the consumer electronics end market. However, Intel’s predictions are particularly troubling. On the consumer side, new processors are set to launch later this year – just in time for the global consumer to end its two-year boom in work-from-home spending on PCs and laptops. And on the data center side, the part of the industry that’s still hot right now, Gelsinger had more bad news in the latest earnings call:

« Turn to DCAI [data center and AI group], as we stated on Investor Day, over the next two years as we rebuild our server product portfolio, we expect growth to be slower than the overall data center market. It’s not a fact that we like, but the predictions that we see.”

Basically, AMD and Nvidia could have a tough time with their consumer-facing portfolio — for AMD, in processors and graphics chips, and graphics chips for Nvidia. For now, data centers and other enterprise AIs should keep Nvidia and AMD on a growth trajectory. That doesn’t seem to be the case for Intel, which itself expects to lose market share to competitors. for the next two years.

Nvidia and AMD shareholders should heed Intel’s warning about weakening chip demand. However, Intel’s problems are unique and do not reflect the entire semiconductor industry. Additionally, Intel is focusing much of its investment in foundry services, a sub-industry of the chip world that its peers don’t participate in. Intel Foundry Services was less than 1% of total revenue in the second quarter, and it will take years to ramp up to be a meaningful part of the business. In the meantime, I expect Nvidia and AMD’s superior chip design portfolio to be much more resilient than Intel will be during the next cyclical downturn in consumer electronics.

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Nicholas Rossolillo and his clients hold positions in Advanced Micro Devices, Micron Technology and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: Long Calls $57.50 January 2023 on Intel and Short Buys $57.50 January 2023 on Intel. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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