Written by Matteo Marcarino
Born on the 18th of July 1968, Intel Corporation is a pioneer in the semiconductor industry that operates from the original HQs in Santa Clara, California. The company has had an edge for decades thanks to the early entry in the field of semiconductors. Its revolutionary invention of what we know today as the CPU (Central Processing Unit) and of the “Computer on Chip” manufacturing process, allowed it to dominate the market by retaining a sizable technological dominance over its competitors.
For decades, Intel was able to exploit the newly created market and consequently, effectively rendered competitors’ offerings uneconomical for potential new customers. This advantage allowed the company to gain most of the market share in portable scale computers as it was almost the only CPU manufacturer able to guarantee high efficiency standards for its products. Although the company suffered major losses in the 1980s – mainly due to high Research & Development expenses (R&D) to manifest its commercially and economically viable technology – the company eventually became very profitable being able to impose high prices and achieve increasingly higher margins.
What is also to be noted is how Intel was originally obliged to help companies set up into its industry under an ordinance from the US government to ensure secondary sources of production for what was becoming a strategic asset for the country. Among these companies were Fujitsu, and more importantly for this article what would become Intel’s main challenger, AMD.
Intel’s Downfall and the Rise of THE Challenger
For years, Intel was able to enjoy the benefits of its past innovations. Moreover, the company’s heavily concentrated vertical structure allowed it to have control of most operations and achieve impressive margins. Problems however, started to arise in September 2014 when the 5th generation of its CPUs was not able to proceed onward from the 14nmto the 10nm manufacturing process. Although its main competitor, AMD, was still stuck at time on the more inefficient 22nm manufacturing process, the date marked the start of Intel’s downfall, mainly driven by a lackluster management and lack of innovation despite huge R&D spending over the years. Further problems on the supply chain prevented the company from improving its offering as the delay towards the 10nm process has just now been resolved with the release of Intel’s 11th generation CPU lineup. This has effectively let AMD and other competitors catch up technologically as they mostly rely on outsourcing the manufacturing of the products they design. Many other factors may have led Intel to lose its technical edge including its past CEOs who all lacked an engineering background, as well as Intel’s long-lasting bureaucracy which caused an intensive process of brain drain from the company.
AMD benefitted massively from Intel’s struggles and it was able to resurrect with the arrival of CEO Lisa Su, a person with an engineering background that can be seen as the real key for AMD’s change of pace. AMD’s R&D spending was on average just ¼ of what Intel spent but it managed to lineup output products very successfully, significantly improving its brand market perception and gaining some pricing power. On top of that, AMD’s outsourcing approach enabled it to exploit technological advancements without encountering any significant supply chain and R&D slowdowns, therefore gaining back market share by capturing demand which could not be fulfilled by Intel. As a consequence, AMD has been gaining market share in the CPU sub-sector for more than 10 consecutive quarters making its product the uncontested best-seller for years now.
In general, evidence of Intel’s past decisions has generated a consensus of the company having created its own demise by underestimating the competition’s ability to catch up, its bad business management and the enacted anti-competitive behavior, which has led to many scandals and multiple violations of antitrust laws. Intel’s struggle for innovation led the firm to settle for dirty tactics which in the long-term, did not pay off but further hampered its market appeal.
Evolving Semiconductor Industry, Apple Silicon
The semiconductor industry has been undergoing a shift in recent years. As more efficient chips are in heavy demand, new solutions and new partnerships are being explored in the marketplace. An example of this is how certain computer manufacturers like Apple and Microsoft are starting to develop proprietary chipset designs for their devices. In fact, 2 completely different technologies can be identified: the x86 architecture utilized by “legacy” manufacturers like Intel and AMD and the ARM architecture, which is proving to be much more efficient and therefore potentially better suited for mobile use. Apple dropping Intel processors because of overheating issues may signal a new wave of competitors arising, especially as the physical manufacturing is being outsourced increasingly to dominant players such as TSMC, GlobalFoundries and Samsung.
Beneficiaries of change, TSMC technological Dominance
What can be observed is in fact how expensive the R&D in the field of semiconductors has become and how economies of scale or scope are now obliged to remain economically competitive, as well as be able to produce with manufacturing processes that satisfy the ever more demanding clients in the industry.
TSMC, a Taiwanese multinational semiconductor contract manufacturing and design company, is one of the few that has benefitted from the rising outsourcing trend. Followingly, Intel is probably going to switch to TSMC to produce its chipsets by 2023 after failing to maintain its vertical integration in the recent period.
TSMC, at the end of 2020, has declared its rush to build facilities through the holidays to meet the surging demand. The aim is to launch a new factory in the southern Taiwanese city of Tainan. The site will be the world most advanced 3nm chip production plant and is due to begin mass production in 2022.
The situation for chip manufacturers as well as its suppliers is likely to get even better as US, European and Japanese carmakers have all recently had shortages of electronics parts with cars becoming “smarter”. One key European company that is benefiting massively from this huge influx of demand is ASML, which is the largest supplier in the world of photolithography systems, key for the semiconductor industry.
AMD solid market position, which Stock is Better?
AMD has been by far the major beneficiary of Intel’s struggle as it is the main direct competitor. Its shares, as of March 2021, have risen by about 3500% in five years. The company will inevitably acquire more market share as the current technological advantage plays out. At this moment in time, it seems like David (AMD) retains full control of the fight as Goliath (Intel) continues to struggle with his back against the ropes. Intel’s stock traded at $60 at the beginning of 2020 and has fallen to $55 the year after, having been as low as $44 on 30 October due to the struggle with a shortage of 14-nanometer chips, late deliveries of 10-nanometer chips, and the delayed launch of its upcoming 7-nanometer chips.
The similarity between the two companies mainly goes back to the difference in the manufacturing strategies of the two businesses. Intel’s strategy has always been to manufacture its chips in-house at its internal foundry, but it has fallen behind its competitors as it can be seen by example of TSMC.
Overall, which stock can we deem as better? Intel has been the market leader for a long time in the semiconductor space, but it is losing market share at a frightening rate. AMD has been a thorn in the side of Intel since the rise of the new Ryzen series in March 2017, increasing its market share from 18% to 37%. The general trend is forecasted to be growing as Ryzen 5000 series desktop processors are perceived to outperform its Intel equivalent. AMD’s focus on power efficiency over the past six years should also trouble Intel and Nvidia, as the mobile market continues to grow and an increasing competition from ARM design is due to hit hard. AMD is not forced to engage in a price war with Intel anymore, as products are now perceived as clearly superior by customers.
Outside of gaming, focusing instead on notebook and desktop markets the trend has been even more profound as Intel share of the CPU market fell from 77.1% to 63.9% between the fourth quarters of 2018 and 2020. During that same time span, AMD shares jumped from 22.1% to 36.1%. Lastly, it needs to be noted that both Intel and AMD are not immune from capacity issues that have heavily hampered both companies with regards to shortages of consoles as a consequence of chip scarcities.
To conclude with a list of Pros & Cons for both of the companies, Intel has secular growth exposure as it was the first to market. Its stock is valued at dirt cheap as expectations are low and the semiconductor industry seems to have an unconditional need of suppliers paired with plenty of breathing room for every player on the market at the moment. On the other hand, Intel is quickly losing market share, new competitors with potentially better technologies are joining the highly profitable sector and its stock has been lagging the industry benchmark since 2017.
The same cannot be said for AMD, as its momentum – both in the stock market as well as its financial statements – holds to this day, its R&D divisions seems to do wonders and its brand perceptions in the mind of gaming enthusiasts has skyrocketed. The company enjoys sustainable revenue growth, higher than average profit margins, solid returns on invested capital and a strong balance sheet. Added to that there are qualitative attributes previously discussed, including excellent stewardship under the new CEO Lisa Su. It is a growth investment that has not only been able to demonstrate an ability to grow rapidly in the past, but which has also evidenced an insatiable appetite to continue that growth path long into the future. Risks for AMD include the problems that might arise with the recent acquisition of Xilinx, the new ARM design. This may challenge its dominance in the industry, as it sticks to the x86 architecture, and a potentially short-squeeze since its stock price is heavily reliant on future expectations.
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 “nm” refers to the transistor size. Small transistors can be fitted on one CPU and thus produce less heat.