Vicor (NASDAQ:VICR) is providing solutions that help Intel (NASDAQ:INTC) compete against ARM in the battle for data center processors. The issue facing Intel is the perception that ARM chips use less power. Vicor provides an efficient power train that supplies power to the Intel processors that are used in the data center. This power train reduces the total amount of energy used in a server.
The stakes are huge for Intel, as Intel has 99% of the data center's shipment share and 80% of the revenue.
The manufacturers of ARM chips and systems are doing everything they can to get a piece of that business. ARM was successful in the mobile market because of their low energy use. Vendors are now trying to take that same concept to provide a lower power chip to compete with Intel in the data center.
Andrew Feldman, corporate VP of AMD (NYSE:AMD), said the energy-sipping ARM design is the architecture of the future. At the Open Compute Summit in January, he said: "By 2019, ARM will command 25% of the server market," and custom ARM CPUs "will be the norm for mega-datacenters," such as those used by Facebook, Microsoft, Google, and Amazon. And ARM expects a 20% market share by 2020.
This battle for lower power has created a unique opportunity for Vicor, and they are expecting a significant increase in revenue and earnings as a result of providing power train solutions for the Intel processors that are used in the data center. Vicor's novel Factorized Power Architecture helps Intel based servers use less electricity.
When looking at power usage, one should look at the complete power train. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) states that up to 40% of incoming Data Center electricity can be lost to transformation and distribution. Google also claims that "you can minimize power distribution losses by eliminating as many power conversions steps as possible." One of the ways that Vicor saves power is by eliminating a voltage conversion step by providing a 48volt to processor soultion. This architecture eliminates an intermediate conversion of 48 volts to 12 volts, and then 12 volts to the sub 1 volt processor.
Intel has Voltage Regulation specifications that must be adhered to in order to power their processors. The VR12.5 is Intel's specification for the Haswell processor and the VR13 is the newer specification for the Skylake processor. Vicor has delivered solutions for the VR12.5 processors, and has VR13 solutions that are waiting on Intel to deliver production Skylake chips for servers.
Several years ago, Vicor had zero revenue from the data center market. This changed when Vicor supplied their CHIP and SIP solution for the Intel Haswell server processor with the Vicor VR12.5 solution. Vicor's VI Chip revenue experienced a jump as a result of this win but the results have been very lumpy due to a single data center customer. Vicor had peak VI Chip and Picor sales of $21,289,000 in Q1 2015. This peak was the result of their data center customer accelerating their deliveries into the 1st quarter at the expense of the 2nd and 3rd quarter. Vicor's trough was last quarter at $7,546,000. Vicor's average quarterly revenue for FY 2014 was $10,380,000.
Now Vicor has design wins from at least two additional data center customers for their Intel Skylake VR13 solution as I noted in this Seeking Alpha Article. As a result, Vicor expects bookings to accelerate in the 2nd quarter of this year with an increase in revenue in the 3rd quarter. These design wins, along with others in the communications, automobile, Super Computer and high-end server markets, will provide Vicor a diverse customer base, that will lead to less volatile revenue, and will enable substantial incremental growth for the foreseeable future.
We expect additional opportunities for Vicor as Intel continues to recommend its solution in its battle with ARM.
Intel is very interested in Vicor, as they are helping Intel by providing very efficient power solutions for their server chips.
Intel needs every arrow in it's quiver, and will do whatever it takes to shore up it's dominance. This bodes very well for Vicor, as Intel embraces and recommends their energy saving solutions.
Vicor expects to diversify its customer base in the second half of this year. This will even out the wild revenue swings and lead to long term sustained growth.
Because of the explosive growth expected from their new products Vicor has a plan to triple its revenue in 5 years. While the time table for this plan has slipped, it is still intact.
In December the CEO, purchased additional shares between $9.00 to $9.50. That is well above the current price of $7.89 a share.
I continue to rate Vicor as a strong buy. I rate Intel as a buy, as they will dominate the data center for years to come.
Disclosure: I am/we are long VICR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.