While the past decade or so has been generally positive for the memory chip industry, with muted downturns and periods of soaring prices, the fundamental nature of the industry is once again rearing its ugly head. Memory chips are commodities, and manufacturing them is capital intensive, making booms and busts inevitable. The current bust, which follows an extreme pandemic-era boom, is the worst since the global financial crisis.
Intel (INTC +4.85%) faces plenty of its own problems. The company has been losing market share across the board to rival AMD; demand for PCs is falling off a cliff; execution issues in its server chip business have delayed key launches; and a multiyear manufacturing investment cycle is running into a tough macroeconomic environment. In short, Intel has a lot on its plate.
NASDAQ: INTC
Key Data Points
Getting out of memory
One thing Intel doesn't have to deal with, at least not directly, is the downturn in the memory chip markets. The company has exited its various memory chip businesses over the past few years, and CEO Pat Gelsinger is adamant about staying out for good. "I never want to be in memory, you see I'm doing everything I can to exit our memory businesses in that regard," Gelsinger said in an interview earlier this year.
Intel began its exit from memory before Gelsinger was appointed CEO in early 2021. The company announced in late 2020 that it had struck a deal with memory chipmaker SK Hynix to unload its NAND business. It was a complex arrangement, with an initial $7 billion payment in 2021 in exchange for the solid-state drive business and Intel's NAND memory manufacturing facility in China, and a final $2 billion payment expected sometime in 2025 in exchange for IP and the workforce at that facility. Intel will continue to manufacture NAND wafers until the final closing, although the facility itself is now owned by SK Hynix.
NAND chips, which are used in solid-state drives and flash memory, are in severe oversupply at the moment. Micron reported that its NAND bit shipments were down by a mid-teens percentage in its most recent quarter on a sequential basis, even as average selling prices tumbled more than 20%.
While NAND is a commodity, Intel's other memory business initially held more promise. Intel worked with Micron to develop 3D XPoint memory, which was first announced in 2015. 3D XPoint was an interesting product. It was nonvolatile like NAND, meaning that it stored data even when the power was cut, but it was dramatically faster and more durable.
Unfortunately, 3D XPoint never gained very much traction. Intel announced in mid-2022 that it was winding down the 3D XPoint business entirely, writing off more than half a billion dollars' worth of inventory. Selling the business would have made no sense, since the underlying technology was essentially dead.
If Gelsinger has his way, 3D XPoint will mark Intel's last foray into the memory chip markets.
Focusing on logic and manufacturing
There's little in the way of a durable competitive advantage that can be gained in cyclical, commodity markets like memory chips. Memory chip manufacturers have essentially no pricing power, and even the low-cost producer will suffer severely during times of oversupply.
CPUs, GPUs, and bleeding-edge semiconductor manufacturing, on the other hand, are not commodities. Intel already leads the CPU market, although it's facing serious competition from AMD. In the GPU market, Intel successfully launched its first discrete graphics cards in decades. And in manufacturing, Intel is pouring tens of billions of dollars into building out its own foundry business to provide manufacturing services to other companies.
These are all areas where Intel already has or can potentially gain durable competitive advantages. There will still be cycles, but an Intel CPU is not the same as an AMD CPU. In the memory chip business, there's very little differentiating products from different manufacturers.
For Intel, memory chips were a distraction. With demand and prices now crashing, Intel's decision to get out of the memory business for good looks prescient.
