It hasn’t been a great six months for Intel.
Since September, the company has had to contend with product delays, major security vulnerabilities, the potential loss of big-name customers, and resurgent rivals. It’s also killed a new product line and faced dozens of lawsuits over its CEO’s massive stock sale.
Yet, if you just focused on the company’s stock price or its earnings numbers, you might have no clue any of that was going on. So far, despite all the bad news, Intel’s stock hits and financial results have not only held up, they’ve surged.
“There have been lot of different distractions around company,” said Mario Morales, an analyst who covers the semiconductor market for research firm IDC. “But they’ve not impacted their ability to maintain a solid position in the markets they serve.”
The big question for Intel, though, is how long its business and stock can hold up — particularly if the hits keep coming.
Intel’s core businesses face new threats
Intel’s bread and butter are its PC and server chips, which dominate their respective markets. Even though sales of its PC chips have stagnated in recent years, Intel’s profits off those chips have actually swelled. Last year, the company posted a whopping $12.9 billion in operating income from its PC chips alone, which was up nearly 22% from 2016.
Meanwhile, its data center chips have grown apace in both sales and earnings. Those processors brought in $8.4 billion in operating income last year, up 16% from 2016.
But there are reasons to worry about Intel’s business in both areas. PC sales have shrunk for years. Although there are signs that the market may finally be stabilizing, there’s little hope it will rebound to a growth market.
Even as there may be fewer sales to go around, Intel faces renewed competition. AMD, its chief rival in the PC chip space, has stumbled for years. But the company’s latest processors are drawing rave reviews for offering comparable performance to Intel’s chips — and potentially even better graphics performance — at a significantly lower price. That combination of performance and low cost should help AMD cut into Intel’s market share and sales, said Morales.
“AMD is finally executing,” he said.
Part of what’s helped Intel dominate the chips world is that its manufacturing process has long been far ahead of its rivals. For years, it’s been able to cram significantly more transistors into a given space than its competitors, allowing it to produce more powerful and more efficient chips more cost effectively. It’s lead has also allowed Intel to charge premium prices for its processors.
Intel may have lost its manufacturing lead
But there are signs that Intel has squandered that advantage. The company has struggled for years to produce chips using its next generation of technology, the so-called 10-nanometer node. Those chips were supposed to be out last year, but now aren’t expected in mass quantities until the end of this year.
As Intel has delayed, one of its chief competitors, Taiwan Semiconductor Manufacturing Company (TSMC) has already started to produce chips based on its own 10 nm process. That process isn’t directly comparable with Intel’s but depending on who you ask, TSMC is close to reaching parity with Intel if it hasn’t surpassed it already.
“TSMC is a real competitor to Intel,” said C.J. Muse, a financial analyst who covers Intel for Evercore ISI. While Muse still thinks Intel’s ahead of TSMC, the Taiwanese company “is probably the closest it’s been [to Intel] in the history of the company.
“Intel has some work to do.”
If TSMC does catch up, other chipmakers — most notably AMD — could make much more competitive chips, threatening not just Intel’s sales, but its profits.
Apple may be ditching Intel
But Intel is facing not just more competition in the PC chip space, but the potential defection of a headline customer — Apple. Reports circulated recently that Apple plans to ditch Intel chips in its Macs for its own homegrown A-series chips that it uses in its iPhones and iPads.
The move would make sense. Apple moved from PowerPC chips to Intel ones a decade ago because advances in PowerPC processors weren’t keeping pace with Intel’s. But now its Intel that’s having trouble keeping pace with the rapid advances in Apple’s A-series processors. By some measures, Apple’s latest iPhone chips are more powerful than the Intel chips in its MacBook Pro laptops.
What’s more, Apple could potentially save money by using its own processors rather than Intel’s.
Muse doesn’t think the move would be a huge financial hit for Intel, because the company has far bigger customers than Apple. If Intel lost all of Apple’s business, it would cost the company about 15 cents a share in annual earnings; by comparison, the company earned $1.99 a share last year.
But the loss of that business could be harder to digest if its having to fight harder to retain its other customers.
Intel’s server chip business is under threat too
And it’s not just Intel’s PC chip business that could come under pressure. Businesses are increasingly shifting their computing processes from their own servers to cloud computing systems such as Amazon Web Services and Microsoft Azure.
Those cloud computing providers use lots of Intel chips. But increasingly, those companies and other big Internet firms such as Facebook are developing their own processors or are relying on different kinds of chips, such as graphics processors, to handle particular tasks. That could eventually make them less reliant on Intel.
The different chips heading to cloud service is “going to bring lot more competition to Intel,” said Morales.
Even as it faces potential potholes in its two major business segments, Intel has yet to show it can build a significantly profitable business outside them. Last week it shuttered its wearable devices unit. It previously failed in its effort to build a business around making processors for mobile phones. Meanwhile, Nvidia has carved out an early lead in the race to develop chips for artificial intelligence and self-driving cars.
Intel needs “more cohesive and aggressive AI story to combat the rise and excitement around Nvidia’s” chips, said Joe Unsworth, an analyst who covers the semiconductor industry for market research firm Gartner.
Of course, all these potential obstacles will likely be relegated to the background this week, when Intel reports its earnings. Wall Street is expecting yet another quarter of significant earnings and revenue growth. Assuming Intel hits analysts’ targets, investors will likely bid up the shares even higher.
And the company is by no means doomed. It still dominates its key markets. Its brand is well known.
But Intel’s longer term outlook is probably more uncertain than its been in a long time.
“It’s hard to move such a very large company,” Morales said.
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