- Nvidia is seeing the potential for significant market share gains against Intel by replacing more data center CPUs with GPUs.
- Intel already has its hands full dealing with AMD's success in data center CPUs. So it doesn't need another battle to deal with.
- Nvidia's AI leadership looks ready for prime time to dismantle and accelerate Intel's data center leadership.
- Intel could fall further behind, even as it faces a highly challenging endeavor to take on TSMC.
- Intel CEO Pat Gelsinger likely has his work cut out here, as the company faces a monumental task to regain its leadership against its peers.
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In my previous Intel Corporation (NASDAQ:INTC) article, I highlighted that investors shouldn't chase the recovery in INTC, as its valuation was no longer attractive. In addition, INTC's unconstructive price action also indicated caution.
A bull trap or false upside breakout formed at its April highs, which was validated. As such, I'm not surprised by INTC's underperformance against the S&P 500 (SPX) and its semiconductor peers represented in the iShares Semiconductor ETF (SOXX) in May.
This week, Nvidia's (NVDA) earnings release helped heap more pain for INTC's "diamond hands," as Nvidia CEO Jensen Huang reminded Intel investors why the battering might not be over. Huang stressed:
We're seeing incredible orders to retool the world's data centers. ... You're seeing the beginning of call it a 10-year transition to basically recycle or reclaim the world's data centers and build it out as accelerated computing. - Bloomberg
I think that's a massive statement for Nvidia and INTC investors. As the data center CPU leader, Intel is most exposed to potentially step-function changes in the data center infrastructure. And the CEO of the world's leading accelerated computing company just made a bold claim that significant changes are coming.
What's worse for Intel is Huang didn't just make a claim; he even reflected it in Nvidia's massive forward guidance. As a result, Nvidia's near-term outlook is so astounding that "Bernstein analyst Stacy Rasgon likened the results and guidance to The Big Bang."
Accordingly, NVDA surged nearly 25% to close yesterday's (May 25) regular session. Arch-rival AMD (AMD) followed through with an 11% increase. However, INTC was one of the worst semi-performers this week, as it closed down nearly 6% yesterday, as the semi stocks advance left CEO Pat Gelsinger and his team out of the way.
If AMD's ability to gain more share against Intel in the data center CPU side of the house wasn't bad enough, Nvidia reminds Intel investors to brace for more pain already on the way.
But why? In an insightful LinkedIn post, ex-Citadel portfolio manager Rich Falk-Wallace discussed why the market re-rated NVDA's valuation substantially.
I assessed that NVDA's near-term upside is likely reflected in yesterday's surge. However, the medium- to long-term potential for Huang to pursue a raid against Intel through its accelerated computing leadership is likely just getting started.
Falk-Wallace argues that Huang's argument of "the beginning of a 10-year transition" could see a substantial "mix shift, where cloud companies are reallocating their CPU and memory spending towards buying GPUs." He discussed the potential for hyperscaler CapEx budgets designated for GPUs to move toward the 25% mark from "10% historically."
Given Intel's market leadership, I believe a "two-pronged" attack by AMD and Nvidia simultaneously could be detrimental, even as Intel attempts its transformation to regain process leadership from Taiwan Semiconductor or TSMC (TSM).
Gelsinger admitted in a recent interview with DIGITIMES that "Nvidia is in a favorable position to benefit from the AI trend," given its dominant market leadership in accelerated computing.
In a recent article, I argued that AMD is not even close to disrupting NVDA's dominance, as Nvidia's software ecosystem has a significant moat. Bernstein analyst Stacy Rasgon also reminded investors that Nvidia has a "hard-to-replicate software ecosystem around its technology that gives it a moat that's even harder to breach."
Notably, Gelsinger lamented Intel's "regrettable decision 10 years ago to stop its AI development," while Nvidia prioritized it and is now in a prime position to leverage its astute investments.
Intel's past mistakes before Gelsinger assumed the leadership mantle keep coming back to haunt the company and its investors.
Despite its relatively cheap valuation (rated "B-" by Seeking Alpha's Quant), it's hard to see how Gelsinger could fend off the two-pronged attack by Nvidia and AMD while competing against TSMC.
I think the market is right to batter INTC from its April highs, as the pain might not be over. INTC is looking increasingly like a value trap that investors should avoid. With Huang "declaring war" to remodel how future data centers should look (with more Nvidia GPUs), Intel's "diamond hands" must be prepared for more downside volatility with unattractive upside potential.
Rating: Hold (Reiterated).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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This article was written by
JR Research is a seasoned investor with a background in economics. He focuses on identifying growth companies, market trends and growth opportunities. His approach combines price action with fundamentals.He runs the investing group Ultimate Growth Investing, which specializes in identifying high-potential opportunities across various sectors. The group is designed for aggressive investors seeking to capitalize on high-growth opportunities, and investors looking for growth opportunities at a reasonable price. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD, NVDA, INTC either through stock ownership, options, or other derivatives. 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.
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