Why Intel’s competitive advantage is collapsing

Intel (NASDAQ: INTC) is the world’s largest chipmaker, with products ranging from personal computing to data centers. Currently, the company is also the leading supplier of central processing units (CPUs) for laptops, desktops and servers. But competition from chipmakers like ARMS, Advanced micro-systems (NASDAQ: AMD), and NVIDIA (NASDAQ: NVDA) has put pressure on Intel in recent years, and it’s starting to take its toll on the iconic company. Here’s why investors should be concerned.

Competition with customers

Intel chips are built on the x86 instruction set, a fundamentally different architecture than ARM chips. The difference between the two is simple: Intel’s chips are built for performance and ARMs are built for efficiency.

However, ARM chips also offer a level of customization that Intel cannot match. Indeed, Intel sells its chips directly, while ARM grants licenses to its partners for its processor architecture. This has allowed various tech companies to build on ARM’s energy-efficient architecture, adding their own customizations to improve performance. In fact, as of November 2020, the world’s most powerful supercomputer runs on custom ARM processors.

Two years ago, Amazon started using its own Graviton ARM-based processors to replace Intel chips in Amazon Web Services data centers. For comparison, Amazon’s custom chips offer up to 40% better price performance than Intel’s. Apple recently made a similar move by replacing the Intel chips in its MacBook Air and MacBook Pro laptops with its own M1 chips. These custom ARM processors actually outperform the latest Intel Tiger Lake laptop processors. And just a few weeks ago, Microsoft followed suit by announcing that it would design its own ARM chips for its data centers and Surface PCs.

It’s bad for Intel. The company is losing customers in markets it historically controlled, such as data centers and PCs, as the preferences of those buyers change. Businesses want customized solutions and current Intel products cannot deliver them.

Competition with NVIDIA

For years, Intel’s Xeon processors have dominated the data center market. However, NVIDIA has also become a key player in this area, as its graphics processing units (GPUs) are much better at speeding up heavy workloads like artificial intelligence. In fact, NVIDIA’s recently launched Ampere GPU is up to 237 times faster than Intel processors.

In 2020, NVIDIA doubled its data center business and acquired network solutions provider Mellanox for approximately $ 7 billion. Compared to Intel products, Mellanox’s network solutions offer better performance and, as a result, have captured a larger market share. For NVIDIA, this acquisition has already enabled the company to combine its GPUs with Mellanox technology to create products like the BlueField-2X DPU, which enhances a Mellanox SmartNIC (network interface card) with ARM CPU cores and the artificial intelligence capabilities of NVIDIA GPUs. In other words, NVIDIA can consolidate its accelerators and network products, thereby improving the security and efficiency of the data center. This not only matches the trend towards high performance networking in data centers, but also further differentiates NVIDIA’s offering as Intel does not offer a comparable product.

Worse still for Intel, NVIDIA has announced its intention to acquire ARM. If approved, it would combine the best accelerators from NVIDIA, the high-performance network from Mellanox, and the energy-efficient processors from ARM. And while ARM processors represent only a tiny fraction of the data center market today, NVIDIA’s focus on R&D could help ARM produce a server processor that moves Intel further from data centers.

Competition with AMD

In recent years, AMD’s Ryzen chips have helped the company gain significant market share from Intel in the laptop and desktop processor markets. For desktop computers, AMD launched its Ryzen 5000 series chips in November 2020. Compared to Intel’s latest desktop chips, the 10th Generation Core processors named Comet Lake, these Ryzen chips provide better performance for everyone. levels – games, single-threaded (lightweight) computing and multi-threaded (heavy) computing. However, Intel plans to launch Rocket Lake, its 11th generation Core processors for desktops, in the first quarter of fiscal 2021. The new technology could help the company regain lost ground.

In addition, AMD has also taken share in the server (data center) market with its second generation EPYC processors, codenamed Rome. And Intel hasn’t helped itself here – the company has delayed the launch of Ice Lake, a third-generation Xeon scalable processor for servers. This chip was originally slated for production in early 2020, but management now says Ice Lake won’t go up until the first quarter of fiscal 2021. That could delay the launch of its next server chip, Sapphire Rapids, which is currently scheduled for the end of 2021. If that happens, AMD may find it easier to take more space in this market with the upcoming release of its third generation EPYC processor, named Milan.

Data source: Mercury Research.

Intel’s financial performance

All of this competition put pressure on Intel, and it took a heavy toll on the company’s financial performance. Overall revenue growth has been slow, up just 26% over the past three years, compared to NVIDIA’s 65% growth and AMD’s 71% growth. Additionally, NVIDIA and AMD’s gross profit margins increased, while Intel’s fell from 62% in 2017 to 53% in the last quarter, indicating a loss of pricing power. Investors should monitor these measures in the future.

On the bright side, Intel still generates significantly more revenue than its competitors, which means the company has more cash to spend on operating expenses and capital. If Intel can harness this advantage, it may be able to repair its crumbling competitive advantage. However, given the good performance of Intel’s competitors and the resulting deterioration in Intel’s financial performance, I think investors should be careful when buying this stock.