Global sales of PCs had been in decline for nearly a decade when the COVID-19 pandemic hit. Instead of hurting demand further, people's need to work and attend school remotely triggered a boom. PC shipments surged by 11% in 2020 and another 15% in 2021. Last year was the strongest year for PC sales since 2012, with unit shipments reaching 341 million.
This was good news for Intel (INTC -0.26%). Even as rival Advanced Micro Devices was winning away some of its market share, the growth of that market helped keep Intel's PC chip sales growing. But all good things eventually come to an end. 2022 is going to be a rough year for the PC industry. Some demand was pulled forward by the pandemic, and the combination of high inflation and recession fears is taking a toll on consumer spending.
Tumbling demand for PCs
Intel now predicts that its total addressable market related to PCs will decline by around 10% this year. Weakness in the consumer and education markets will be the biggest factor in this decline, though demand for commercial PCs may also take a hit later this year if businesses pull back on their tech spending.
Intel's PC chip segment actually did substantially worse than the overall PC market in the second quarter. Revenue from its client computing group plunged 25% year over year, and segment operating income crashed by 73%. Sales of notebook chips were down more than 40%, not too surprising given how many laptops were sold over the past two years.
Intel is underperforming the PC market because manufacturers are now drawing down on inventory as they brace for a difficult environment. What this means is that Intel is selling PC chips at a rate below the rate at which its customers are using them. "[O]ur Q2 PC unit volumes suggest we are shipping below consumption as some of our largest customers are reducing inventory levels at a rate not seen in the last decade," said CEO Pat Gelsinger during the second-quarter earnings call.
This inventory correction will eventually run its course, after which Intel's sales will adjust to levels that are back in line with the PC market. Intel expects the second and third quarters to be the bottom of the slump for the company as a whole. Management anticipates that a combination of seasonal strength, lower customer inventory levels, and price increases will drive its PC-related sales higher in the second half of the year compared to the first half.
A strong roadmap
Intel's latest Alder Lake PC chips are unquestionably good products. The company has sold over 35 million units of them, and their innovative architecture, which mixes high-performance cores with high-efficiency cores, delivers significant gains over Intel's previous products. While AMD's Ryzen chips had overtaken Intel in terms of performance prior to Alder Lake, Intel struck back in a big way with those chips.
The next couple of years will be exciting in the world of PC central processing units (CPUs) as Intel and AMD battle for supremacy. Intel's next-gen Raptor Lake CPUs are set to launch this fall, delivering double-digit performance gains over Alder Lake. Meteor Lake chips will then come sometime in 2023, built on the new Intel 4 manufacturing process. Meanwhile, AMD's Ryzen 7000 series chips are expected to launch in a matter of months.
Investors should expect at least one more rough quarter for Intel's PC segment as its manufacturing customers realign their inventories to reflect lower demand. Once that process is done, Intel's PC segment performance should start to look a whole lot better, especially as its new product lines arrive on the market.