Advanced Micro Devices (AMD -2.94%) and Nvidia (NVDA 0.35%) hold a near-duopoly in discrete GPUs. Nvidia controls the majority of the market with its higher-end chips, while AMD remains the persistent underdog in the lower-end market. However, that duopoly could soon be threatened by Intel (INTC 0.02%), which recently returned to the discrete GPU market after an absence of more than two decades. According to JPR, Intel captured 4% of the discrete GPU market in the third quarter of 2022, compared to roughly 0% a year earlier. AMD's share dropped from 17% to 8%, while Nvidia's share rose from 83% to 88%.

It wasn't surprising to see AMD cede some of its market to Nvidia, but its losses to Intel are troubling because the latter has been targeting many of the same lower-end PC gamers as AMD. Let's see why Intel is expanding into discrete GPUs again, and how that expansion could throttle AMD's long-term growth. 

A person plays games on a PC.

Image source: Getty Images.

Why is Intel selling discrete GPUs?

Intel is still the largest maker of GPUs in the world, thanks to the integrated GPUs that are directly baked into its CPUs, but those chips can't handle graphically advanced games and applications. That's where powerful discrete GPUs, which are installed separately as add-in boards, come in.

Two decades ago, the discrete GPU market was dominated by Nvidia and ATI, which would be acquired by AMD in 2006. Intel attempted to break into the market with the i740 GPU in 1998, but it flopped and was discontinued after just a few months. It tried to return to the market with a new discrete GPU in 2009, but that project was ultimately scrapped.

The lack of a powerful GPU has been a sore spot for Intel, since AMD now bundles together its CPUs and discrete GPUs in APUs (advanced processing units) for PCs, Sony's PS5, and Microsoft's Xbox Series S and X consoles. Intel even licensed Nvidia's GPU technology for its own integrated graphics chips until that deal expired in early 2017.

That's why Intel finally launched a new generation of Xe discrete GPUs in late 2020 and early 2021. That first batch included its Iris Xe MAX chips for mid-range laptops, as well as other Xe GPUs for desktops and servers. Those chips paved the way for the arrival of its more powerful Arc GPUs, which challenge AMD's Radeon and Nvidia's GeForce in the high-end PC gaming market, in early 2022. Like AMD and Nvidia, Intel outsources the production of those 7 nm GPUs to Taiwan Semiconductor Manufacturing.

Several recent industry benchmarks reveal that Intel's Arc A380 delivers much better performance than AMD's Radeon RX 6400 across a wide range of games. That's a bright red flag for AMD in the low-end market, since the RX 6400 costs about $10 more than the A380, which retails for around $140. Nvidia's comparable GTX 1630 costs about $200.

How could Intel hurt AMD in the GPU market?

Intel's market share gains wouldn't be too troubling if the entire GPU market were still expanding. But discrete GPU shipments actually plunged 42% year over year to 14 million units in the third quarter of 2022, according to JPR, as the PC market shrank. Therefore, Intel, AMD, and Nvidia are all fighting for a shrinking market.

Intel's return to discrete GPUs also coincides with a cyclical slowdown for AMD. AMD's revenue rose 45% in 2020 and increased another 68% in 2021 as people bought new PCs to work remotely, attended online classes, and played more PC games. Analysts expect its revenue to rise another 43% this year, partly driven by its acquisition of Xilinx in February, but to slow to just 6% growth in 2023 as it laps that purchase and faces a slowdown now that pandemic fears have eased.

Starting in the second quarter of 2022, AMD began reporting its gaming revenue separately from its CPUs and other embedded chips. Its gaming revenue increased 32% year over year in the second quarter, but only grew 14% year over year (and stayed nearly flat sequentially) to $1.6 billion in the third quarter. During both quarters, AMD said its robust sales of its semi-custom APUs for gaming consoles offset its declining sales of gaming GPUs for PCs.

AMD expects that slowdown, which is also weighing down its CPU business, to continue for the foreseeable future. Therefore, Intel's Xe and Arc GPUs could cause even more headaches for AMD's gaming business as the broader PC market sputters out.

But AMD's pain isn't Intel's gain

Intel has seemingly landed a surprising blow against AMD in the GPU market, but that victory doesn't address its core problems of sluggish CPU sales and its inability to manufacture smaller and more power-efficient CPUs than AMD, which also outsources the production of its CPUs to TSMC.

Instead, it merely highlights Intel's hidden dependence on TSMC, its top competitor in the foundry market, and reveals that it can't manufacture superior discrete GPUs through its own foundries yet. AMD might face some fresh headwinds from Intel's discrete GPUs, but investors shouldn't assume those headwinds will generate significant tailwinds for Intel either.