No Holiday PC Sales Boost for Intel and AMD

Global shipments of PCs tumbled 28.5% year over year in the fourth quarter, according to Gartner, marking the largest quarterly decline in at least two decades. No geographic region, market segment, or vendor was spared. Demand for business PCs, a bright spot for the industry for most of last year, is now sinking fast. Even Apple suffered a 10% decline in shipments.

The magnitude of this decline and the uncertainty over demand for PCs in 2023 could lead the ongoing inventory correction across the PC supply chain to become harsher for suppliers. PC vendors stuck with bloated inventories and a dismal demand outlook are going to be eager to knock down inventory levels and free up capital. That's not good news for Intel (INTC -9.20%) and Advanced Micro Devices (AMD 2.37%).

Widespread inventory corrections

Overall PC shipments were down 16.2% in 2022 thanks to the terrible fourth-quarter results and a 19.5% decline in shipments during the third quarter. This year probably won't be quite as bad, but a significant decline is still likely.

Consumers bought a lot of PCs in 2020 and 2021. It's now clear that this surge in demand wasn't a permanent shift but a case of demand being pulled forward. With inflation putting pressure on household budgets and a potential recession looming, anyone with a semi-recent PC has little reason to upgrade.

On the business side, a slowing economy is starting to impact PC purchasing decisions. Businesses are keeping PCs for longer and delaying upgrades, and at least in some industries, layoffs and hiring slowdowns are contributing to weaker PC demand as well.

All of this puts Intel and AMD in a tough spot as they battle for market share. Both companies suffered in the third quarter as inventory corrections swept over the supply chain. Those inventory corrections may now take longer than expected to fully play out, given the size of the fourth-quarter decline in shipments.

Intel saw revenue for its client computing group drop 17% year over year in the third quarter, just about in line with the decline in global PC shipments. For AMD, the situation was far worse. Revenue in AMD's client segment crashed 40% year over year, a potential sign that AMD's inventory situation is worse than Intel's.

Another sign that AMD is struggling is the retail pricing of its desktop chips. Both its last-gen Ryzen 5000 CPUs and its current-gen Ryzen 7000 CPUs have been selling at steep discounts for months. Prices are changing fast, but right now, the current-gen Ryzen 7700X is going for 25% below suggested pricing on Amazon, and the last-gen 5700X is selling for 23% below suggested pricing. Discounts on Intel's chips have generally been smaller, and the company recently raised prices on its last-gen Alder Lake chips to combat cost inflation.

With fourth-quarter demand for PCs so weak, both Intel and AMD will likely report steep revenue declines in their respective client segments in the fourth quarter. But given the pricing situation at retail, AMD's results could be worse than Intel's.

Intel's Raptor Lake has the upper hand

Since AMD launched its first Ryzen chips in 2017, the company has gained ground and ultimately surpassed Intel in terms of performance and performance per dollar. But the advantage flipped back to Intel last year with the launch of its Raptor Lake chips.

Raptor Lake beats AMD's latest Ryzen 7000 CPUs in nearly every type of workload thanks to big performance gains and a hybrid architecture that pairs powerful CPU cores with efficiency CPU cores. On top of having the edge in performance, Intel has been fairly aggressive on pricing. This has put AMD on the defensive. At suggested prices, Ryzen 7000 CPUs make little sense, and that pricing disadvantage is amplified by the higher cost of building a system around the chips.

AMD has announced new low-power Ryzen chips that lower the barrier to entry, as well as powerful 3D V-Cache chips that will aim to steal back the gaming crown from Intel. Along with discounted prices at retail, AMD will be more competitive in the coming months than it was when Raptor Lake was first launched. But demand for PCs has deteriorated so much that it may not matter much in terms of AMD's results.

A tumbling PC market will test both Intel and AMD this year. Intel's ability to manufacture its own chips may give it an important cost advantage, and AMD likely won't have a real answer to Raptor Lake until 2024. As demand falls off a cliff, Intel appears to be in a better position to ride out the storm.