Last week saw both bad news and good news come the way of Intel (INTC +8.78%) shareholders. Early in the week, Reuters reported that both Nvidia (NVDA +0.77%) and Advanced Micro Devices (AMD +3.32%) were at work designing Arm (ARM +2.50%)–based PC processors by 2025, in a challenge to Intel's main cash cow business.
That report came out on the same day Qualcomm (QCOM 1.17%) introduced its own new Arm-based PC system-on-chip called the Snapdragon X Elite for PCs, which will start appearing in laptops next year.
The onslaught of competition coming for Intel is a big risk. But later in the week, the processor giant delivered an earnings beat and a more positive outlook, with the stock bouncing back 9.3% Friday.
On Intel's post-earnings conference call, CEO Pat Gelsinger addressed the new challenge coming for Intel's PC business, which the company will tackle head-on in a couple of ways.
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Gelsinger voiced skepticism around Arm challengers, but is he too relaxed?
The competition for Intel is no small matter. The three main challengers noted by Reuters all produce chips on leading-edge nodes by virtue of their foundry, Taiwan Semiconductor Manufacturing (TSM +1.16%). Around five years ago, before Gelsinger came in as CEO in early 2021, TSMC passed Intel on process technology. And certainly, Nvidia especially has earned respect for its amazing foresight and innovation chops on its way to dominating the AI GPU market. So, it's no small matter if Nvidia enters the PC chip market.
However, Gelsinger has long noted that the only way for Intel to fend off threats is to out-innovate its competitors. And certainly, Intel's execution over the past year has been encouraging. The company's Gen4 Sapphire Rapids chip for the data center has seen better-than-expected uptake and pricing in 2023. And Intel's "five nodes in four years" roadmap has remained on track, in contrast with the continual delays of the pre-Gelsinger era.
On the PC chip front, Intel has begun shipping, and will officially release on Dec. 14, its new PC chip Meteor Lake. It's a pretty exciting release, as Meteor Lake will be the first PC chip Intel has produced using a number of new innovations: It's the first to use extreme ultraviolet lithography, and the first to use a "chiplet" architecture, stitched together with its advanced packaging platform called Foveros. Meteor Lake is also more than just a CPU, as it stitches together high-performance CPU cores along with energy-efficient cores, along with an AI accelerator, a GPU tile, and tiles for memory and PCIe controllers, along with an I/O tile.
Interestingly, by having both high-performance and energy-efficient cores in a single chip, this may be somewhat of a defense against Arm-based challengers. This is because Arm chips are generally known for better efficiency than high-powered x86 chips. But if Intel's innovations at the chip level can route workloads to cores based on the need for either performance or efficiency, that would likely win out.
So this is all positive. But one note of caution in this investor's eyes was that Gelsinger seemed a tad complacent on the new challenges, saying:
ARM and windows client alternatives, you know, generally they've been relegated to pretty insignificant roles in the PC business. And we take all competition seriously, you know, but think history is our guide here. You know we don't see these as potentially being all that significant overall.
History does indeed show that. But Intel hasn't yet had to deal with three giants Nvidia, AMD, and Qualcomm all coming for the PC chip market at once. And the success of M2-based Mac laptops over the past few years went unacknowledged. So some more caution might be warranted.
Image source: Getty Images.
But Intel has a partial fallback plan
Of course, even Arm-based PC chips take hold, Gelsinger noted a potential fallback -- these customers could use our foundry!
Gelsinger noted that Intel has an opportunity to produce Arm-based chips at its foundry, given the company's ecosystem progress and packaging capabilities. Certainly, Intel is hoping it will bring a TSMC alternative that not only offers customers geographic security, with TSMC's leading-edge fabs still located in Taiwan, but that will also meet or surpass TSMC on process technology, which Intel anticipates will happen in 2025.
Intel's new foundry revenue is negligible now, but it's aggressively ramping with the help of CHIPS Act subsidies in the U.S. and similar subsidies around the world. Last quarter, Intel notably received a large third-party customer pre-payment for its 18A and Intel 3 fabs coming online next year and 2025. And on the earnings call, Intel announced it signed two more customers for 18A, while disclosing a fourth customer it expects to sign by year-end.
Intel is impressing in the face of intensifying competition
It should be noted by investors that while Intel is executing exceptionally well this year and its turnaround seems on track, it has a long way to go. Intel's financials have improved, beating analyst expectations, but still inked a slightly negative operating margin in the just-reported quarter.
While investors should expect more improvement and better profitability into next year, Intel will also face more competition coming from Arm chipmakers -- but perhaps new opportunities as well. For value investors interested in turnarounds, Intel is a name to monitor closely over the next year.
