INTRO: For decades, Intel was the king of semiconductors.
Their performance was unmatched and consumers were proud to have an Intel powered machine.
Even 5 years ago, Intel maintained much of this same dominance as they simply had
no competition. But with time, it seems like Intel’s brand power and market share are just
being eroded away year after year. Meanwhile, they’re competitors are doing better than
ever before. AMD has been consistently posting all time high market share and Nvidia nearly
reached a trillion dollar valuation. Not to mention, we’ve been experiencing the biggest
chip shortage of all time over the past 2 years. So, if Intel was ever going to get back on track,
it was during the past 2 years. But, Intel has been struggling to even fully recover.
In fact, Intel is still down 37% from their dotcom high which was set 22 years ago. In that same time
period, AMD has grown 3X and Nvidia has grown 70X. And if you needed any more confirmation
that investors have no faith in Intel, you just have to take one look at their PE ratio which
currently sits at 7.35. For perspective, even Toyota has a PE ratio above 10. And Toyota is in
the slow moving automotive industry, not the semi conductor industry. So, what happened to Intel?
MISSING OUT ON MOBILE: One of Intels’ first missteps
was missing out on the mobile market. In the late 2000s and early 2010s, smartphones were
just starting to gain popularity. And contrary to popular to belief, Intel was actually on top of
this. In fact, they started development of a chip called the Atom in 2004 which was specifically
designed for small internet-connected devices. And the first Atom chip called the Silverthrone came
out soon after the first iPhone in 2008. But while Intel did realize the potential of small devices,
they vastly underestimated the potential of smartphones. You see, when Apple was developing
the iPhone, they actually approached Intel and asked them to be their chip provider. And Intel
would spend some time doing volume, cost, and revenue projections. But, unfortunately,
Intel would turn down Apple thinking that producing chips for the iPhone wouldn’t
be worth the effort. Clearly, Intel vastly underestimated the popularity of the iPhone,
and Intel’s former CEO, Paul Otellini was actually super upfront about this shortcoming. He stated
quote “in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”
While it’s great that Paul was able to acknowledge their shortcoming, this doesn’t change the fact
that Intel not only missed out on Apple, but all of the major smartphone manufacturers from
Samsung and Xiaomi to Oppo and Huawei. This gave Qualcomm the perfect opportunity to step in and
dominate the sector. Intel would eventually come around to this market and they would get the atom
chip into smartphones even from Samsung and LG. But, Intel never became the primary chip provider
for any of these companies not just because they were late but because they didn’t produce
ARM architecture chips. If you’re not familiar with ARM architecture chips, these are basically
the standard within the mobile industry. The key difference between ARM chips and Intel chips is
their power draw. ARM chips are specifically designed to be as power efficient as possible
while Intel chips are generally optimized to offer as much performance as possible.
Intel took a gamble with performance over efficiency, and this was definitely the wrong
move given that 95% of smartphones are powered with ARM based chips today. Intel tried to hang
on as long as possible, but they would eventually give up in 2016 after losing a major contract.
While Intel had decisively lost out on the smartphone chip market, they did spot one more
opportunity within the mobile market and that was 5g modems. Intel was actually rather early to this
market and they were even in talks with Apple to become their primary 5g modem producer. But,
the problem was that Apple wasn’t entertaining Intel’s offer because Intel was their top choice,
but because they had issues with Qualcomm. And unfortuantely for Intel, Apple and Qualcomm
settled their differences right before Intel’s partnership was about to begin. Intel could’ve
tried to compete against Qualcomm, but they didn’t really want to do this, so they would end
up selling their 5G modem business to Apple for $1 billion. And before you knew it, Intel had missed
out on the first wave of smartphones, the second wave of smartphones, and the race towards 5G.
AMD:
Aside from missing out big on the smartphone market, Intel would also face serious competition
within their core market from none other than AMD. This was definitely something that Intel did
not see coming. From their perspective, they had won the desktop market. They had loads of deals
all over the place even including Apple. But, this would all change when a woman named Lisa
Su joined AMD in 2012. Lisa knew that Intel had a massive lead in terms of technology,
not to mention, AMD was nearly bankrupt. So, the only way AMD could catch up was by risking it all
and that’s exactly what she did. One of the core characteristics of all semiconductor companies
is the Tick Tock model. This is when companies switch between improving the chip itself to
improving the manufacturing process. Improvements to both of these are crucial in producing more
powerful chips, but companies will never attempt to do both of them at the same time. Doing both
at the same time makes troubleshooting errors extremely difficult because the error could be
due to the new manufacturing process or due to the new chip. Despite this, Lisa chose to ditch the
Tick Tock model and just try to improve both sides at the same time. For years, we had little idea
as to how well this process was going, but when Ryzen and Epyc were launched in 2017, it was clear
that AMD had hit it out of the park. AMD had not only caught up to Intel in terms of technology,
but they had actually outdone them especially in terms of multi tasking. For the same price,
Ryzen offered significantly more cores and threads than Intel. Now of course, each of these cores
were less powerful than Intels, but for many tasks such as streaming, having more cores
was preferable to having more powerful cores. But, AMD was just getting started. Lisa’s goal
wasn’t just to beat Intel but leave them in the dust, and that’s exactly what they’ve done. One
of the clearest signs of this was how quickly AMD was able to transition to the next architecture.
If you’re not familiar with chips, they’re usually classified by a size such as 7 nm or 10 nm
which is indicative of their fabrication process. The long term goal is to make these sizes as small
as possible and let’s just say AMD smoked Intel to 10 nm chips. AMD launched their 7 nm architecture
3000 series chips in mid 2019. Meanwhile, Intel didn’t complete their transition to 10 nm till
early 2021. Now, it should be noted that AMD’s 7 nm architecture is roughly equivalent to Intel’s
10 nm architecture, but this still means that AMD beat Intel to market be roughly 18 months.
All of this has made AMD the top choice for desktop users. In fact, AMD overtook Intel in
terms of desktop CPU marketshare in early 2021. At this point, the only reason Intel is still hanging
on is because they have so many deals with laptop and PC makers, and gamers still often prefer Intel
due to superior single core performance. But, if Intel doesn’t make moves against AMD right now,
it’s likely that this market will slowly dissipate as well.
STAGNATION:
The rise of the mobile market and stiff competition from AMD were no doubt major external
threats to Intel’s business. But, honestly, AMD likely wouldn’t have been able to catch up and
even humiliate Intel if Intel was on top of their game, and truth is, Intel simply wasn’t. I mean,
if you want proof, just take a look at the GPU market. Lisa has advanced AMD exponentially within
the GPU space as well, but they still can’t quite catch up to Nvidia. Now, don’t get me wrong here,
AMD GPUs have become a solid option especially from a price to performance perspective. However,
if we simply look at the most powerful GPUs on the market, there’s no question that Nvidia is
the clear winner. And the key reason for this is that Nvidia and Jensen Huang were always on
their A game. So, when AMD starting throwing punches with their Radeon and Vega GPUs,
Nvidia was well prepared to fight back. Meanwhile, Intel was simply caught off guard,
and one of the main reasons for this is Intel’s leadership crisis. Intel’s leadership issues
can be traced back to 2005 when Paul Otellini took over. Paul was actually the first CEO of
Intel that was not an engineer. He had joined the company’s sales and marketing division in 1974,
and he slowly worked his way up from there. Paul’s lacking technological background was actually a
major concern when he took over. But he appeased much of the skeptics with phenomenal revenue.
Paul was a master marketer and deal maker which allowed Intel to become more dominant than ever
before within the desktop market. With that being said though, it could be argued that Paul’s
lack of technological experience resulted in him making poor fundamental decisions for the company.
For example, he didn’t embrace ARM based chips. I feel that someone with a technological background
like Jensen Huang or Lisa Su would’ve made this jump in a heartbeat. While Paul may
have made some bad technological moves, at least he blew up Intels’ profits and revenue. Intel’s
next CEO Brian Krzanich didn’t do this either. Intel’s revenue basically just went sideways
throughout all of his leadership. This makes sense as most of Brian’s leadership was just filled with
pulling out of the smartphone market. The worst part, however, was the drama that Brian brought
with him. You see, in 2018, it would be revealed that Brian was having an affair with an employee
and this would get him fired. Bob Swan would replace him as CEO, and unfortunately for Bob,
this was terrible timing. He inherited Intel right as AMD was doubling down on Ryzen which meant that
Bob had to take all the heat for falling behind. And it was under Bob’s leadership that Intel
struggled to transition to 10 nm chips. To make things even worse, it was under his leadership
that Apple ditched Intel. As you would guess, Bob didn’t last very long and he was quickly replaced
by Patrick Gelsinger in early 2021. Fortunately, Patrick Gelsinger does have a technical background
and he’s been with Intel for over 40 years. So, hopefully, he’s the right person to turn Intel
around. But, there’s no doubt that the last decade of Intel’s leadership wasn’t the most productive.
THE FATE OF INTEL:
Looking forward, Intel is no risk of going bankrupt. They’re still pulling in 10s of billions
in profit every single year. But, with that being said, Intel is not the best of positions either.
They’re not the dominant chip player that they used to be. And looking forward, it seems more
and more likely that Intel turns into something like AT&T, Cisco, or GE. While these companies
are still massive, they’re not exactly exciting or innovative. And in a fast moving industry such
as semi conductors, it’s not clear how long Intel can just remain dormant. The rest of the industry
has already eclipsed Intel several fold over the past decade. Nvidia is currently worth 2.5 times
Intel, and that’s with Nvidia being down 50% from their all time high. And earlier this year, even
AMD overtook Intel in terms of market cap which was unthinkable just 5 years ago. Also, let’s not
forget about the chip shortage. AMD’s profits grew 5X during the shortage, Qualcomm’s profits grew 4X
during the shortage, and Nvidia’s profits grew 3X during the shortage. Meanwhile, Intel’s net income
didn’t even move. And if Intel can’t catch up during a chip shortage, it’s unclear if they ever
will. And, at this point, it seems like the best case scenario for Intel is to just maintain their
marketshare because the days Intel dominance are long gone. Do you think Intel can recover? Comment
that down below. Also, drop a like if you’re glad that AMD introduced competition into the market.
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