A lot of hope is being placed in Intel's (INTC +7.06%) Foundry Services business and for good reason. It's not just a pillar of chipzilla's plan to recapture semiconductor industry dominance, it's also an important endeavor as countries around the globe try to localize chip manufacturing.
But Intel has fallen on hard times, and it hasn't provided a super rosy outlook for the immediate path ahead. Numerous other chip companies like Nvidia (NVDA +1.95%), Advanced Micro Devices (AMD +7.26%), and memory chipmaker Micron Technology (MU 3.34%) have stated that some end markets for semiconductors (consumer electronics like PCs and smartphones in particular) are in decline after a couple of years of record spending during the pandemic.
In terms of overall sales, Intel is still a titan. But does its latest warning spell trouble for top growth names Nvidia and AMD?
NASDAQ: INTC
Key Data Points
Intel's big competition problem
First, a quick primer on the chip industry and how it works. Intel rose to dominance over decades by handling all of its own chip design, manufacturing, and distribution. Over the decades, though, some smaller chip companies began to focus on a specialty, handling either just design (known as a "fabless" chip business, essentially an engineering firm) or manufacturing (known as "chip fabs," with Taiwan Semiconductor Manufacturing (TSM +1.32%) now being by far the largest).
Meanwhile, Intel's operating model of vertical integration has been steadily in decline in recent years. Companies like Nvidia and AMD, which solely focus their resources on design work, have leap-frogged Intel on the technological front. And specialists like Taiwan Semiconductor have done a superb job building up their capabilities as trusted third-party manufacturing partners for fabless peers. For a long while, Intel was able to mask the fact that smaller companies had caught up on the technological front thanks to its massive scale (it's easy for customers to keep buying more Intel chips if old Intel chips are what need replacing) and high profit margins.
NASDAQ: NVDA
Key Data Points
But after a decade of cloud computing development, the pandemic set off a massive wave of IT infrastructure upgrades. Intel's outdated hardware was not prepared to take advantage of the boom over the last couple of years, and now a cyclical downturn in consumer electronics is cropping up. Intel revenue in Q2 2022 fell 22% year over year to $15.3 billion, and operating margin went from a positive 28% a year ago to a negative 4.6% in Q2 this year.
The full-year 2022 outlook isn't great either. Intel expects overall revenue to decline 16% from 2021 at the midpoint of guidance, and for earnings per share to be cut in half.
A deteriorating economy can certainly be blamed for the dreadful quarter and outlook. Other chip companies are suffering too. But even Intel CEO Pat Gelsinger admitted Intel's problems aren't everyone else's problems.
NASDAQ: AMD
Key Data Points
"The sudden and rapid decline in economic activity was the largest driver of the shortfall, but Q2 also reflected our own execution issues in areas like product design, DCAI [data center and AI group] and the ramp of AXG [accelerated computing and graphics group] offerings."
It's a humble admission from Gelsinger, but the issues really predate his return as CEO in early 2021. Check out how Intel's operating segments have done against smaller Nvidia and AMD's comparable segments in the last couple of 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 over year.
|
Period |
Intel Data Center and AI Group Revenue |
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 over year.
Things might get bad for everyone, but especially Intel
The immediate-term outlook isn't great for the entire semiconductor space that sells to the consumer electronics end-market. However, Intel's forecast is particularly troubling. On the consumer side, new processors are set to launch later this year -- just in time for the global consumer to wind down its two-year work-from-home spending boom on PCs and laptops. And on the data center end, the part of the industry that's still hot right at the moment, Gelsinger had more bad news on the last earnings call:
"Turning to DCAI [data center and AI group], as we stated at investor day, over the next couple of years, as we rebuild our server product portfolio, we expect to grow slower than the overall data center market. It's not a fact we like but the forecast we see."
Basically, AMD and Nvidia could be in for some tough times on their consumer-facing product portfolio -- for AMD, in processors and graphics chips, and graphics chips for Nvidia. For the time being, data centers and other enterprise AI should keep Nvidia and AMD on a growth trajectory. That doesn't appear to be the case for Intel, as it itself expects to lose market share to its competitors for the next couple of years.
Nvidia and AMD shareholders should pay attention to Intel's warning on weakening demand for chips. However, Intel's troubles are unique and not reflective of the semiconductor industry overall. Plus, Intel is focusing much of its investments on Foundry Services, a sub-industry of the chip world that its peers don't participate in. Intel Foundry Services made up less than 1% of total revenue in Q2, and 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 far more resilient during the upcoming consumer electronics cyclical downturn than Intel will be.
