Intel Corporation (NASDAQ: NASDAQ:INTC) and Advanced Micro Devices (NASDAQ: NASDAQ:AMD) both operate in the semiconductor industry competing against each other in the microprocessor market. While Intel dominates this market, AMD remains its significant rival and is rapidly gaining market share.
In 2018, Intel announced the delay in volume release of CPUs based on its 10nm production process. Originally set for a late 2018 launch, supply issues have pushed this back to late 2019. Intel also announced it was putting its H310 chipset on hiatus as it couldn’t manufacture enough 14nm silicon to cope with demand. Due to these shortages, Intel dramatically increased the prices of its CPUs. This resulted in the CPU market share of Intel falling drastically in areas that were heavily hit by low supply and huge price hikes. Although this served its purpose of boosting profits, AMD was able to gain a huge chunk of unit market share from Intel.
Source: AMD 2018 10-Q
When full-year 2018 results were released by AMD and Intel, we finally got confirmation of AMD's significant rise in market share. The company gained share in all three CPU segments of server, desktop and notebook. AMD gained 2.8% share in desktop to reach 15.8% market share. Looking at the server market, AMD sits with a 3.2% market share which was a 2.4% increase Y/Y. Finally, in the notebook market, AMD saw its fortunes rise to 12.1% market share comprising a 5.3% gain.
Despite significant strides by AMD, Intel is the unquestioned leader in the microprocessor market. Looking at their CPU revenue segments, the sheer size of Intel becomes very apparent compared to AMD.
|Platform CPU Segment Breakdown||Intel||AMD|
|Desktop||$ 12,220||$ 946|
|Notebook||$ 20,930||$ 1,218|
|Server||$ 21,155||$ 312|
|Total CPU Revenue||$ 54,305||$ 2,476|
|Total Company Revenue||$ 70,800||$ 6,475|
|CPU % of Total||77%||38%|
Source: Intel 2018 10-K
Although the earlier results of units sold released by AMD are impressive, they are slightly misleading. The data showed market share as a % of units sold. When looking at market share as a % of revenue, Intel's dominance looks even stronger.
|% Units Intel||84.20%||87.90%||96.80%||90.41%|
|% Units AMD||15.80%||12.10%||3.20%||9.59%|
|% Revenue Intel||92.82%||94.50%||98.55%||95.64%|
|% Revenue AMD||7.18%||5.50%||1.45%||4.36%|
Source: Intel 2018 10-K
As seen above, Intel's 95.64% market share of revenue is much higher than its 90.41% market share of units sold. This is possible due to their pricing power. So while it may have lost unit market share to AMD, it has maintained its revenue growth by inflating its CPU prices. In fact, its volume of desktop CPUs sold dropped 6% Y/Y, but was mitigated by price increases of 11%.
One of the reasons of Intel's dominance despite by its high prices lies within its focus on delivering high performance products through continuous innovation. That is not to say AMD is far behind. AMD's products are some of the most high-performing in the industry. It has won many awards including the coveted CES 2018 Best of Innovation Award. Its graphics and processors including Ryzen, Radeon, EPYC have all been echoed as one of the fastest and most-high performing in the industry.
Despite this, Intel spent the whole of 2018 churning out products. Eventually, the Intel Core i9-9980XE and i9-9900K outperformed the AMD's Ryzen chips along with many Threadripper 2nd Generation chips. Although their performance just tops AMD's Ryzen generation of chips, Intel's focus on delivering the best chips has enabled it to maintain its position as industry leader.
As seen above, although Intel leads in performance, AMD's chips trail closely behind. In addition, AMD releases chips that are noticeably more affordable than Intel.
This was apparent at one of Europe's leading retailer Mindfactory, where AMD products rose to over 70% share of Mindfactory's 2018 Q3 sales vs. Intel's 30%. The Ryzen 7 2700X and Ryzen 5 2600 were the most popular AMD CPUs at the retailer while Intel’s Core i7-8700K remained the most popular Intel 8th Generation Core processor. For the first time, AMD’s Ryzen CPUs had a higher market share than Intel’s most popular high-end processor choice.
Looking at the price trend chart, it is easy to identify that AMD gained unit market share due to Intel increasing its prices. Consumers simply do not value Intel's processors as highly as the company does, for the minor performance gain. To identify the exact price difference, I analysed a list of 137 processors of Intel and AMD and determined the average selling price ('ASP') of both companies.
|Intel Average Selling Price||AMD Average Selling Price|
As seen above, Intel's products sell for an average of 228% more. Although AMD's low pricing started as necessity in order to penetrate the CPU market controlled by Intel, it has now become a competitive advantage to the company and the main reason of its significant gain in unit market share. The pricing difference also explains how Intel still manages to keep a large chunk of its revenue share despite losing unit sales.
The numbers show strong growth for AMD in multiple markets, emphasizing that the company’s financial improvement wasn’t simply driven by crypto related sales. Intel obviously remains the dominant player in the industry, but the market is clearly responding to Ryzen’s value proposition across the entire computing space. Increased competition and better product options are always a good thing for consumers, and this might see AMD extend its market share much further, considering that its processor speed is only 8% slower than Intel's, while its average selling price is 228% lower.
The current CPU market is based on x86 micro-architecture processors, produced by just Intel and AMD. ARM based micro-architecture, on the other hand, is prevalent in light, portable, battery-powered devices such as smartphones and tablets.
The company responsible for ARM-based processors is private company ARM Holdings which is owned by SoftBank (OTCPK:SFTBY). ARM does not actually design or fabricate chips. It designs the cores of the CPU, and licenses the IP to other companies to design and fabricate the actual chips. Its revenue is earned through mainly licensing and royalty agreements.
The model of ARM based chips is seen as an advantage to most consumers as the chips can be customised to the user. This model is also significantly cheaper for the customer. Because of this, ARM based chips have gained considerable traction over the past 10 years, with over 130 billion units currently in the market.
Source: ARM 10-Ks and 10-Qs
ARM estimates 44% of all chips with processors (non-CPU) are based on ARM micro-architecture. Their rapid adoption and dominance of the non-CPU processor market is what makes their impeding force a significant threat.
In the second half of 2018, ARM announced it would storm the CPU market in 2019 and that its generation of processors would outperform Intel's laptop chips. While this claim is a stretch given Intel has since delivered 3 processors which broke previous performance records, it may not sound trivial in terms of overall value.
The world's largest company, Amazon (AMZN), announced in November that it will be running ARM based processors for its servers. It claims the ARM chips will reduce user costs by 45% for parallel workloads. In January, the world's largest telecom equipment maker, Huawei, also launched a new ARM-based chipset for its data center services.
Laptop makers including Lenova, Asus and HP have also released ARM based laptops, which boast extended battery lives and comparable performance to x86 processors at much lower prices. The most recent blow came just last week, from insiders at Intel, who reported that Apple (AAPL) will begin transition to ARM-based processors in early 2020.
ARM's entry has not been underwhelming. At the start of this year itself, we already see ARM gaining a foothold over the CPU market. It has become clear that they would be able to capture a significant portion of the CPU market, and potentially end the x86 CPU dominance.
Firstly, looking at the current pricing and performance of the processors, it is clear ARM will not be competing in terms of performance. The latest Cortex-A76 ARM chip performs on the same level as Intel's 2.6GHz Core i5-7300U. That is still around 20% less than Intel's latest 8th generation chips.
What they will be competing on is pricing and chip area. ARM pricing is around 250% cheaper than Intel. Its chip area (sq mm) is around half of both Intel and AMD. This is the reason they have been able to gain a lot of traction in the data server segment with the likes of Amazon and Huawei. These companies are able to pack double the amount of ARM chips in the same area, which still comes out cheaper than using Intel's chips.
Compared to AMD's chips, ARM is only priced around 27% lower. Given the small difference for AMD's superior performance, I do not see it being able to displace AMD. In addition, AMD has also been developing its own ARM-based chips since 2012. The following slide is from AMD's 2012 investor presentation:
AMD's Opteron A1100-series released in 2016 for servers is based on ARM micro-architecture. The reason for not mass-rolling out these product lines may simply be because ARM had not been adopted by many third-parties yet, and its current x86 production lines are simply more profitable. The point is that AMD have over 6 years of R&D with ARM-based processors and, given their similar price point to ARM, could easily transition should it need to.
|Unit Market Share (%)||2018||2019F||2020F||2021F||2022F|
|Revenue Market Share (%)||2018||2019F||2020F||2021F||2022F|
The rise of ARM would be devastating to Intel's market share. As seen above, Intel's unit market share is projected to drop 20% to just 71.40% over the next 4 years. Again, this is slightly misleading due to Intel's higher prices. In the equivalent chart of revenue market share, Intel will still remain with 87% market share. However, that is still a significant drop, and just about cripples its CPU revenue growth.
|Total Market Revenue||$ 56,781||$ 58,030||$ 59,307||$ 60,612||$ 61,945|
|Intel CPU Revenue||$ 54,305||$ 54,548||$ 54,724||$ 54,605||$ 53,892|
|Change in Revenue||+11.74%||+0.45%||+0.32%||-0.22%||-1.31%|
|AMD CPU Revenue||$ 2,476||$ 2,954||$ 3,235||$ 3,526||$ 3,829|
|Change in Revenue||+28.09%||+19.32%||+9.50%||+9.01%||+8.59%|
In 2019, we can expect Intel's revenue increase to be 0.45%. This is a far from the 11.74% in 2018, keeping in mind of course that the majority of its 2018 increase was due to price hikes. From 2021, Intel's CPU platform revenue will actually start to decrease as ARM-based processors start to pick up pace. AMD, on the other hand, can still expect double-digit growth in platform CPU sales next year, followed by high single-digit growth in the following years.
Intel: Intel announced that $1 billion in investments were made to ramp up 14nm production to solve its supply issues. Despite that, I believe the damage has already been done with AMD and now ARM capitalising on it. The CPU platform revenue comprising of 77% of its total revenue is expected to flatline. The company, however, has signalled a move to diversify its revenue stream with 3D XPoint technology, Internet of Things, as well as strategic acquisitions with the likes of Altera (contributing to its networking segment) and Mobileye (positioning itself for entry into the autonomous vehicle technology market). Its potential revenue from non-platform CPU markets and strong cash flows just about justify its current share price. It carries a hold rating with a consensus price target of $54.00.
AMD: While AMD makes strides to diversify its portfolio by investing into embedded business, its strategy of aggressively penetrating markets with low-priced, high-performance products has made it a significant player within the two main markets it operates in (CPU and GPU). While its platform CPU revenue only consists of 38% of its total revenue, I expect it to be its main revenue driver in the coming years. Its cost competitive advantage should enable it to not just nibble away at Intel's market share but also defend itself against the rise of ARM. Despite its already high valuation, its double-digit earnings growth justifies a higher share price. It carries a buy rating with a consensus price target of $26.44.
SoftBank: The parent company of ARM Holdings is by no means a dormant player. Aside from its 100% stake in ARM, it also owns stakes in some of the world's largest companies, including Fortress Investment Group (100%), Boston Dynamics (100%), Sprint (85%), Alibaba (29.5%), Yahoo Japan (48.17%), Brightstar (87.1%), Uber (15%), (20%), Ola (30%), Grab (10%), Renren(42.9%), InMobi (45%), Hike (25.8%), Snapdeal (30%), and Fanatics (22%), among others. Their knack of picking up scalable high-growth companies such as ARM holdings, even before they list publicly, has earned them the reputation as one of the world's leading investors. Their current share price trades at a steep discount and is more than 25% undervalued. It carries a buy rating with a consensus price target of $60.00.
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Disclosure: I am/we are long AMD. 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.
Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but I do not guarantee its accuracy or completeness.