Intel: Going Micro For Major Growth In Servers

| About: Intel Corporation (INTC)
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Intel (NASDAQ:INTC) is one of the largest semiconductor companies in the world with a market capitalization of $111 Billion. It dominates the semiconductor industry in the PC and server markets and now is developing solutions for the micro-server sub-set of the server market. This new sub-set of servers is being developed to meet the changing needs for data centers. The massive influx of internet devices from the explosion of mobile devices is changing the structure of data centers. The micro-server market in general is trying to address the incredible amount of server resources needed to serve the billions of mobile devices being connected onto the internet.

The growth of cloud computing, the use of social media, and the mobile explosion are changing the requirements of data centers. These computing tasks require very little in terms of computing power so chips commonly seen in smartphones can be used effectively to manage these workloads. Micro-servers fit the needs of cloud computing by utilizing low power energy efficient SoC (systems on a chip) to replace the more powerful chips used in traditional servers. The Moonshot system by Hewlett-Packard (NYSE:HPQ) is a micro-server system that utilizes the new Intel Atom 1200 processor, which is the world's first low power 64-bit server class SoC for high density micro-servers.

The micro-server market is expected to grow at approximately 70% annually, according to TechNavio's analysts. IHS iSuppli Research shows the growth of this segment in the illustration below:

As you can see by the chart for 2013 the micro-server market is forecast at approximately 300,000 units globally but then grows to 600,000 units in 2014. The growth rate of this segment is tremendous but the scale is rather small. Estimates are this market will only account for maybe 10-15% of server sales by 2015. So even with this tremendous growth it is a relatively small component of the overall server market. HP also predicts the traditional servers powered by Intel Xeon chips will account for approximately 60% of the market and will be the largest segment.

Now back to micro-servers; at an average price of $55 a processor and 45 processors per server this segment of the market could be worth $1.485 billion in 2014 and up to $2.97 billion in 2016. If Intel takes 90% of this market, which is not overly optimistic, this market could represent 13% growth by 2014 and 26% growth by 2016 for its Data Center Group. This would represent something like 7% annual growth. Gartner Research is forecasting the entire server market to increase in revenue by 3.5% annually through 2017. Even though this market is relatively small compared with the entire server market I feel it is important for Intel to compete in this segment to protect market share and continue to grow revenue for the Data Center Group.

Securing this sub-set of the market could create the opportunity for Intel to triple its growth in the server market and protects its position from Advanced Micro Devices (NASDAQ:AMD) and ARM Holdings (ARM). Both of these companies are aggressively attacking Intel's dominate position in servers and this sub-set specifically. The limit of uses for this kind of server will have an impact on the overall size the sub-set can reach. It is great only for web hosting and cloud computing and can be used in data research tasks that can be parceled out to multiple servers working on the problem in parallel. Because of these limitations and inability to deal with analytical tasks HPQ believes this sub-set of the server market will supplement traditional servers instead of becoming a replacement for them.

The newest processor, the Atom processor "Avoton," is built on the 22nm manufacturing process with 8 cores featuring frequencies of 1.6 GHz - 2.4 GHz and turbo boost technology. The new silvermont micro-architecture also utilizes out-of-order execution, which allows for a more efficient processing of tasks. This new chip again highlights the ability of Intel's manufacturing advantage to create superior products. Intel has consistently been criticized for not being able to develop SoCs that are energy efficient. This new Avoton SoC will have a thermal design power as low as 6 watts with clock speeds up to 2.7 GHz with the turbo boost. It also brings additional features to the system including SATA 3, USB 2, and gigabit Ethernet, which was missing from the Centerton (Atom 1200 Processor).

This product, which is addressing the server market, not the mobile market, again highlights the ability of Intel to not only compete in spaces that require extreme energy efficiency but to be on the leading edge of those technologies. Here we see Intel pulling away from the competition with a product that contains more features than chips designed on ARM designs while also bringing extreme energy efficiency to the product. This is the theme I believe we will continue to see from Intel for the future. Even in the traditional server market we see Intel pushing energy efficiency improvements into its products. The Xeon series of chips will be based on the Haswell architecture for the E3, E5 and E7 series. At IDF Beijing in April 2013, Intel released information on these Xeon refreshes and shows in its presentation that the E3 series will have a thermal design power as low as 13W bringing the energy consumption down by almost one-third.

As Intel pushes down into smaller and smaller manufacturing processes with the new 3-D transistors technology more and more computing power will be provided while also seeing a dramatic lowering of power consumption. The out-of-order execution allows the tasks to be routed through the chip around bottlenecks. This creates faster and more efficient use of processor resources and ultimately improves performance while reducing power consumption. Intel also has developed power management tools to lower the idle power consumption of the SoC and to manage the parts that are actively being used to bring down power consumption even further. Intel is already at the 22nm process and pushing down into the 14nm process while its competitors are still using 32nm and 28nm processes. This manufacturing advantage will allow Intel to pass the competition in all markets including the mobile market and will continue to drive value to the company. I have been bullish on Intel for a while now so take my opinion with a grain of salt. While the micro-server market will not be the new revenue story for Intel it does highlight the ability of the company to develop low-power solutions based on its Atom processors.

Disclosure: I am long INTC. 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.