Intel (NASDAQ:INTC) is the largest manufacturer of PC and data center CPUs in the world. It controls nearly 80% of the PC CPU market and 99% of the data center CPU market. Those two markets, which generate most of Intel's revenues, make it the second largest chipmaker in the world after Samsung.
Despite having wide moats in its core markets, Intel's long-term future looks murky. The 49-year-old company missed the transition toward mobile devices, abandoned Moore's Law, and is still struggling with slower upgrade cycles in PCs and data centers.
Intel is trying to stay ahead of the tech curve with investments in Internet of Things (IoT) chips, programmable chips, and non-volatile memory chips. It's branching out into new markets like baseband modems, wearables, drones, and driverless cars. But if Intel isn't careful, it could lose five of its higher-growth markets to other companies.
In 2016, Apple (NASDAQ:AAPL) split its baseband modem orders between Intel and Qualcomm. Intel rejoiced for two reasons -- Apple had used Qualcomm modems exclusively for years, and the shift helped Intel regain a foothold in the mobile market.
Intel's baseband modems were slower than Qualcomm's, but the ongoing legal disputes between Apple and Qualcomm reportedly pushed Apple to exclusively use Intel modems in its 2018 iPhones. However, various reports indicate that Apple is talking to Qualcomm's rival MediaTek about a new modem deal, and that Apple is developing its own modem to completely eliminate its dependence on third-party modem makers.
Intel doesn't disclose exactly how much money it makes from selling modems, which are included in its Client Computing Group. However, my Foolish colleague Ashraf Eassa recently estimated that Intel could be generating over $1 billion in annual sales form modems -- which would be equivalent to 1.5% of its projected revenue this year.
Intel generates more revenue from Apple via sales of Mac processors. However, a recent Bloomberg report claims that Apple could also replace Intel's CPUs with its in-house CPUs by 2020. RBC Capital Markets estimates that blow could reduce Intel's annual revenues by $3 billion to $4 billion, or 5% to 6% of its estimated revenues this year.
That move shouldn't be surprising, since Apple already uses its own A-series chips in the iPhone, iPad, and Apple TV. It's unclear if Apple can make CPUs that match Intel's industry-standard horsepower, but a lot could happen in two years.
The Internet of Things
Intel's IoT revenues rose 20% last year and accounted for 5% of its top line. That growth looks solid, but Intel remains the underdog in the IoT market compared to SoftBank's (OTC:SFTBY) Arm Holdings.
Arm's chip designs dominate the mobile and IoT markets, because they're generally more customizable and power-efficient than Intel's chips. Arm licenses its designs to a wide range of chipmakers, including Apple, Qualcomm, MediaTek, and NVIDIA (NASDAQ:NVDA).
Arm claims that its chip designs power 95% of all smartphones, 95% of all wearables, and 85% of automotive infotainment and under-the-hood systems across the world. Arm also recently partnered with NVIDIA to boost the AI capabilities of its low-power IoT devices.
Speaking of NVIDIA, the GPU maker is becoming a major threat to Intel in the data center market for two reasons. First, its high-end Tesla GPUs are eclipsing Intel's Xeon CPUs in importance for machine-learning tasks. This means enterprise customers could postpone their CPU upgrades to buy more GPUs.
Second, NVIDIA's DGX-1, which puts "400 servers" in a single box, and the DGX-2, a rack with twice the computing power of the DGX-1, could disrupt the traditional data center market with their compact designs, lower price tags, and more power-efficient setups.
A recent Forrester report found that the $129,000 DGX-1, which is powered by eight Tesla GPUs and two Xeon CPUs, could reduce data center costs by "millions" and pay for itself in less than six months.
Intel has made decent progress in the automotive market. It introduced its Atom Automotive chips for infotainment and navigation systems, acquired top ADAS (advanced driver assistance systems) maker Mobileye, and bought computer vision start-ups like Movidius and Itseez. It also partnered with BMW and Fiat Chrysler to produce a self-driving platform within the next few years.
However, NVIDIA still has a first-mover's advantage in driverless cars. Its Drive PX supercomputer, which converts traditional cars into autonomous ones, is arguably the most advanced driverless platform on the market. It holds self-driving partnerships with a growing list of companies, including Baidu, Volkswagen, Mercedes-Benz, Tesla, and Toyota.
The key takeaway
Intel clearly doesn't plan to sit still and fall behind the tech curve again. But it faces tough rivals at every turn, and investors should keep an eye on Apple, Arm, and NVIDIA to better understand those competitive headwinds.