Intel Makes an Important Point

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It's no secret that there seems to be a big rush toward low-power, high-density servers, also known as micro-servers, particularly within the ARM (NASDAQ: ARMH  ) camp. Intel (NASDAQ: INTC  ) , believe it or not, was first to market with a very competitive solution, known as Avoton. However, even though Intel seems to be jumping into this nascent market with both feet -- in stark contrast to its mobile snafu -- there is a big concern that margins will be worn down.

The bear argument
The idea behind these micro-servers is that instead of using a bunch of hefty processors with beefy cores to do work for which these processors may be overkill, a data-center operator would instead want to buy chips with very high integration, less brute CPU power, and lower-power envelopes, leading to a total cost-of-ownership savings.

The notion, then, is that even if Intel is successful here, it will be selling lower-ASP Atom processors into this market. Many confuse lower ASP with lower margin, which isn't the case. The idea is that if these chips are smaller and lower-power, they're probably cheaper to make, too. So, on a raw margin-dollars-per-unit, they may be "lower-margin." But on a gross margin percentage level -- and given that more of these processors will usually be purchased for the given workload -- it actually turns out to be a wash.

Intel proves the point
While the claim above seems plausible, the key is that Intel actually confirmed this at its analyst day:

Source: Intel

In fact, in the presentation, CFO Stacy Smith actually hinted that the Atoms -- not the higher-end Xeons -- generated higher gross-margin dollars per wafer than the Xeons. This would seem to be contradictory to the bear argument that a mix-shift down to Atoms would be detrimental to profit growth.

No, this probably isn't going to end up like smartphones
Another argument that Intel bears often cite is that this market is destined to become very price competitive. There will be a ton of players coming online here, and this space will, indeed, become more competitive. However, very few will have the scale or wherewithal to actually drive a price war -- and the ones that do aren't going to do so simply for the sake of doing so.

Further, as the unit volumes in this market are likely to be measured in the hundreds of thousands to low millions, rather than the billions that mobile apps processors drive, gross margin percentage will be very important here to recoup the development costs -- 40% gross margin probably won't cut it, and would put many of these smaller players out of business quickly. As with most data-center chips, these will be 60%-plus gross margin devices.

Foolish bottom line
While this market will get competitive, thanks to ARM's continued push, it is going to be very difficult for the smaller ARM-based players to gain traction unless they're targeting a niche/design point that Intel isn't going to be interested in -- or can't service with its current Atom or Xeon cores. Samsung, Qualcomm, and some of the specialty network players will certainly have a good chance here. But even then, Intel is deeply entrenched and has beaten out many larger, more powerful chip players in the server market over the years. 

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2014, at 8:57 PM, jimbeama wrote:

    with smaller die you get higher yield in terms of the % of good die per wafer. So you could get more $$ per wafer with the small Avotons versus the large Xeons given a comparable price per sq. cm. of silicon sold.

  • Report this Comment On February 03, 2014, at 9:52 PM, keeperoftheq wrote:

    AMD unveils its first ARM CPU, the 64-bit 8-core Opteron A1100

    Extremetech | January 29, 2014


    image: Extremetech

    AMD has finally taken the wraps off its upcoming 8-core ARM SoC, codenamed Seattle. Seattle (officially designated Opteron A1100) is a server-class clip, with four or eight 64-bit ARM Cortex-A57 cores. The part, which begins sampling in March, is aimed squarely at the low-power server market, where AMD hopes that the SoC's low cost (about one tenth the cost of competing Intel Xeon parts) can wrestle some market share from Chipzilla. Performance-wise, AMD only gives rough figures, but it appears that the top-end A1100 will be around 2.5x faster than AMD's current low-power Jaguar-based server chip (the Opteron X2150), while maintaining the same TDP.

    Ashraf, can Intel compete with 1/10 the cost? I do not believe so.

    The 12 Core and 16 core AMD / ARM Micro servers will be sampling some.


  • Report this Comment On February 03, 2014, at 10:07 PM, keeperoftheq wrote:

    The reality is that ARM AMD servers will be made at a much lower cost to AMD. Think about it. 1/10 the cost competing Intel parts.

    I do not believe even Intel will be able to come even cole to this. With AMD Bridging the X86 architecture with ARM, AMD the only chip maker doing this, will make it much harder for Intel to compete.

    Will Intel be willing to solace the prices below cost? Talk about margin killers.

  • Report this Comment On February 04, 2014, at 4:15 PM, techy46 wrote:

    The same logic works for using Atom chips in PC and tablets if Intel can increase the unit volume sold across all PC's including 4-10" smart phones and tablets. Microsoft needs to quit screwing around with Google and come right out and say This is Androird adware and This is Windows with Ad blocker; make consuemrs aware of Google's AD ID and cookies destroying their privacy.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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