I have not covered the semiconductor industry for a
long time, but analysts’ reactions to Intel’s recent earnings call are too loud
to ignore. The stir has been caused by the delayed rollout of Intel’s 7nm chips
by six months, which are now planned to be launched by late 2022. AMD is now expected
to gain substantial lead time over Intel, as its latest chips are already built
on a 7nm process and will gain further lead by moving to the 5nm process by
late 2021.
A Bernstein analyst went on to say that the earnings call
was the ‘worst we have seen’ in the company’s history. Indeed, Intel’s share price
tanked by 20% after the call, and has been languishing there for more than a
month now.
That said, despite the pessimism exuding from
analysts, revised price targets are not that bleak, down mostly in the 6%-14%
range. The analyst reaction prompted Bill Maurer to comment in Seeking Alpha that ‘it seems everyone thinks Intel is dead’. He
goes on to say that while the bleak commentary would have you believe that
projections moving forward would be quite bearish, it is not really the case,
and Maurer therefore recommends to ‘skip the funeral’. Of course, this is
partly because Intel is no longer just a chip company – about half of its
operating profit is now contributed by the data center group.
This is not the first time when AMD has left Intel
behind on the development front. In the past twenty years or so, AMD’s share
price has done significantly better than Intel in two instances. One is now,
and the other one was when AMD held sway with its Athlon processor.
A brief history of AMD will reveal that fortunes in
the processor market can be fleeting, and tables can turn overnight. Perhaps
this prompted Andy Grove to say “only the paranoid survive”. The point that I
wish to put across is that AMD has been here before, but it needs tremendous
effort to stay at the top when you have a rival like Intel. While AMD’s recent
feats are by no means trivial, Intel has the capability to bounce back if it
gets really serious about the CPU market.
The beginnings of AMD as an underdog
Let us start from the start then. Both companies trace
their roots back to Fairchild Semiconductor. Intel was formed when two
employees of Fairchild, Robert Noyce and Gordon Moore, left the company in 1968
to form N M Electronics. Less than a year later, eight people left Fairchild and
set up AMD. Historically, AMD was considered the cheap, copycat option. Before
1999, what Intel designed, AMD simply tried to make better. But even though AMD
used to ‘reverse engineer’ Intel’s processors, they trumped Intel on
performance – for instance, the Am486 processor launched in 1993 offered
roughly 20% more performance than Intel’s i486. AMD’s success with the 386 and
486 helped double its revenue to USD 2bn during the 1990-94 period.
Days of Glory
In 1996, AMD acquired NexGen, a chip design company
whose Nx686 processor demonstrated a 180 MHz core speed when AMD’s K5 and K6
(under development) were facing scaling issues. After the buyout, the Nx686
became AMD’s K6 and thus began an era of AMD’s dominance over Intel. Interestingly,
Vinod Dham, who is called the Father of Pentium, had left Intel in 1995 to join
NextGen. A classic case study that underlines the importance of keeping track
of key management movement. The K6 processors, launched in 1997, gave stiff
competition to Intel’s Pentium series and costed half as much as equivalent
Pentium chips.
AMD retained its research edge, for instance, the K6-2
was known for offering an easier route to accessing the CPU’s floating-point
capabilities. Finally, in 1999, AMD launched Athlon, which truly rocked the
boat. It stood apart on several counts, from overclockability, to DDR RAM
support and full speed L2 cache. In 2003, Athlon was upgraded to Athlon 64,
because it added a 64-bit extension to the x86 instruction set. Till early
2006, AMD had the upper hand in the server market as well with its Opteron chips.
This was the period when AMD’s share price did far better than Intel, whose
Netburst architecture was looking like a failure. The company’s rating was
upgraded from B2 to Ba3 in January 2006 by Moody’s. And then, AMD’s juggernaut
hit an iceberg.
The ATI acquisition blunder
AMD decided to acquire ATI Technologies, the graphics
card manufacturer, in July 2006. The deal size was USD 5.4bn, comprising USD
4.3bn in cash and loan, and the rest raised through equity. This was about half
the market capitalisation of AMD at that time. ATI had no manufacturing sites
and negligible revenue, and the value could almost entirely be attributed to
its intellectual property. Over the next few years, AMD had to write off USD 3.2bn
related to ATI's acquisition, revealing the extent to which the company had
overpaid for ATI. In what could be termed as an embarrassing blunder, AMD also sold
off the handheld graphics division of ATI for just USD 65mn. That division is
now known as Adreno.
On the development front, AMD’s planned to challenge
Intel in the server market through its quad core K10 Barcelona processor
(Intel’s Xeon chips were just dual core). However, a bug was discovered in the
K10, and by the time a BIOS patch was rolled out, AMD’s reputation had been
damaged.
Intel makes a comeback
Meanwhile, Intel dumped Netburst and switched to their
older Pentium M architecture. The Pentium name, now much maligned, was
relegated to low-end budget models and was replaced with “Core”. In end-July
2006, the Core 2 Duo was launched and by the end of the year, Intel had
reconquered the summit. AMD tried to retaliate by pushing the quad-core K10
design to the desktop market in late 2007. While the K10 was superior in some
aspects, it was slightly slower and more expensive. It seemed that AMD’s
research pipeline had run dry.
AMD perhaps then thought that the Athlon brand had
suffered some damage, and launched Phenom to challenge Intel’s popular Core 2
Quad Q6600. But by this time Intel was well-entrenched on the software side of
business, and unlike AMD, advertised more. Intel had its own foundries tailored
to its own products and a large marketing budget. Intel did not stop here
however. They used their large cash reserves to keep AMD CPUs out of new
computers. Intel paid Dell a whopping USD 723m to remain the sole provider of
its processors. AMD stood little chance to compete. The company was downgraded
back to B2 by 2008.
AMD rises from the ashes
In 2010, AMD pulled up its socks by cutting down
costs, disposing assets (chipmaking foundries) and focusing solely on processor
design. The initial products were disappointing – the FX series could not
effectively compete with Intel’s Core i7 for instance on power consumption and
size. Support came from unexpected quarters though. The purchase of ATI helped
AMD to come up with a combined CPU and GPU package, which was later used in the
Jaguar architecture and selected for the Xbox One and PlayStation 4 in 2013. However,
this helped to build reputation instead of profitability, as margins tend to be
weak in the console business. AMD generated operating losses in each year from
2012 to 2016 (except 2013), and revenue was on a downtrend. But then in 2012,
AMD hired former lead architect Jim Keller, who returned after a 13 year
absence, and Lisa Su from Freescale Semiconductors.
Meanwhile, cracks were starting to appear in Intel’s
citadel. In 2012, Intel expected to release CPUs on the 10nm node within 3
years. The company however released the first 14nm CPU in 2015. Yield issues
kept cropping with 10nm.
The Ryzen effect
In March 2017, AMD launched Ryzen on its entirely new
architecture (Zen). Ryzen was remarkably different from the processors that had
come before it, and as Ryzen 3 and 5 models were released, they gave stiff
competition to Intel on price. The developments kept on coming – in April 2018,
AMD came up with Zen+ and in mid-2019, Zen 2 was launched. Helped by the
success of Ryzen, AMD’s cash flows and profits witnessed a welcome turnaround.
The CFO/Debt improved from just 6% in FY16 to 96% in LTM June 2020.
How closely Ryzen’s launch and success coincides with
a turnaround in AMD’s fortunes can be seen from its rating history. The company
witnessed a string of upgrades since 2017, at very short intervals. From being
at a precarious Caa1 in September 2016, AMD was upgraded to B3 in February
2017, and is now rated Ba2, almost close to investment grade.
At the same time, Radeon (AMD’s graphics division),
which had its roots in ATI, started to do well when given full independence.
The new architecture is being deployed by Microsoft and Sony for their new
consoles (Xbox and PlayStation 5). That said, Radeon is still far behind Nvidia
and is seen as a budget option.
AMD has won the battle but not the war
As of now, with USD 7.6bn of revenue in LTM June 2020,
AMD is even smaller than Nvidia (USD 13.1bn in LTM Jul 2020), forget Intel. In
fact, Nvidia is so strong that its market capitalisation has doubled YTD at
roughly USD 340bn, and is worth more than Intel and AMD combined. New titles
like the Flight Simulator 2020 that need tremendous graphics power will keep
the growth going for Nvidia. While one can argue that Nvidia is focused only on
graphics cards and lacks diversification, AMD too is heavily dependent on the
Ryzen series. AMD also has limited presence in the Enterprise segment, where
Intel rules the roost (Intel derived USD 27.7bn from its data center group
alone). AMD will also face problems because of its weak marketing. The ‘Intel
inside’ campaign is still yielding dividends for its rival.
This time AMD is not competing with Intel alone. With
Amazon’s Graviton2 and Ampere (that has a whopping 128 CPU cores) also in the
race, the competition is heating up. Also, Radeon is still not out of the
woods. Only recently gamers faced serious driver related issues. In a poll of
49,000 AMD GPU users, about half stated that they experienced driver problems.
AMD however has a few aces up its sleeve. Nvidia chose
AMD over Intel for their new AI compute clusters, because AMD offers more cores
and faster PCI Express lanes. AMD’s share for laptop processors reached a new
all-time high of 19.9%, and new Ryzen 4000 mobile processors are expected to go
into more than 100 laptop designs this year. Moreover, AMD’s latest chips are
already built on a 7nm process and the 5nm process is expected by late 2021,
whereas Intel’s 7nm chips will arrive by late 2022.
The real risk to Intel might be on the server (data-center)
front
The bigger threat to Intel is from future in-house processors
by cloud players (like Graviton2 from Amazon). These can hurt Intel where it
now rules supreme – the server market. Intel holds a ~90% market share in the
lucrative data-center/server market (operating margins of ~44%), although AMD
is gradually gaining share just by offering lower prices. Competition can also
come from Ampere, and from unexpected fronts like SiPearl, a Parisian company
which is being backed by the European Commission as a part of European
Processor Initiative Project. If price-led competition gets tough, Intel might
be forced to sell Xeon chips at less than USD 1,000. The question to ask would
be “Can Intel sustain if Xeon margins collapse?”.
Intel has historically shied away from low-margin
businesses. It ignored Steve Jobs’ suggestion that they fabricate an ARM chip
for the iPhone because of the thin margins in phone CPUs. Intel’s strategy has
been that of a high-volume, high-margin company, which cannot afford to offer
low-margin versions of its products for fear of cannibalisation. If the server
market mirrors that of mobile processors, Intel’s days of glory might be well
behind it. But that story is yet to play out.
The Empire strikes back
It appears that AMD has the upper hand as of now, but
Intel has been quick to make changes. The Chief Engineering Officer Murthy
Renduchintala left the company in August and Intel is considering to hire a
third-party foundry to build its processors. A few days ago, Intel launched its
new 11th Gen Tiger Lake laptop chips. When put to test against an AMD Ryzen 7
4800U device and a machine running an Nvidia MX350, the an 11th Gen Iris
Xe-powered laptop (Tiger Lake machine) clearly comes out top, with
significantly better frame rates.
Intel has previously tackled the AMD challenge either
by its sheer balance sheet and marketing power, or on the development front
(Core 2 Duo against the Athlon). The company is not going to go down easily and
I am tempted to use one of my favourite witticisms from Mark Twain “The reports
of my death have been greatly exaggerated”.
Sources:
1.
Google
Finance
2.
Yahoo
Finance
3.
CapitalIQ
4.
AMD
5.
Techspot
6.
AnandTech
(https://www.anandtech.com/show/161/4)
7.
Techcrunch
8.
PC
Gamer (https://www.pcgamer.com/intel-tiger-lake-11th-gen-launch/)
9.
All
About Circuits (https://www.allaboutcircuits.com/news/ampere-altra-max-128-core-processor-challenges-intel-and-amd-in-a-cloud-based-processor-showdown/)
11. Standard and Poor’s
12. Moody’s Investor Services
