Intel's Latest Earnings Show Its Battle with AMD Isn't The Only Thing That Matters

Though AMD has been gaining CPU share, an improved demand environment is helping Intel report solid growth -- at least for now.
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Intel  (INTC) - Get Report and AMD  (AMD) - Get Report both have their share of passionate fans who are convinced that their favored company will crush its archrival.

But s Intel’s latest results, guidance and earnings call commentary demonstrate, things can be a lot more complicated than that.

On one hand, Intel delivered Q4 results and Q1 guidance that made it clear that AMD’s recent PC and server CPU momentum isn’t preventing the chip giant from seeing solid top-line growth in the near-term. And (thanks in part to a relatively low pre-earnings valuation) markets have responded to Intel’s numbers by driving its shares about 7% higher in Friday trading.

Intel’s server CPU division (the Data Center Group, or DCG) is doing particularly well thanks to a major pickup in demand from Internet/cloud giants. DCG’s revenue rose 19% annually in Q4, and Intel signaled that DCG will see strong double-digit growth in Q1 as well.

Intel’s PC CPU division (the Client Computing Group, or CCG) only saw 2% growth in Q4, as healthy PC demand and higher iPhone modem sales were partly offset by CPU supply constraints and AMD’s share gains. But Intel did guide for CCG’s revenue to grow more than 10% in Q1, as it adds production capacity and benefits from the tail end of a business PC upgrade cycle caused by Microsoft’s  (MSFT) - Get Report ending of Windows 7 support.

With Intel’s server CPU share still believed to be near 90% -- AMD estimated it had a mid-single digit share at the start of 2019, and aims to have a double-digit share by mid-2020 -- a surge in cloud orders can provide a big top-line boost in spite of AMD’s share gains. And a similar dynamic is at play in the business PC market, since AMD’s corporate PC share is believed to be much lower than its consumer PC share.

It’s also worth noting that Intel is seeing solid growth in a slew of areas where AMD either doesn’t compete or has a very limited presence. These include storage and network processors, Ethernet chips, vision processors for driver-assistance systems and server CPUs for telco networks and IoT/edge computing deployments.

But in spite of Intel’s near-term strength, the company’s full-year guidance implies that its revenue for the last three quarters of 2020 will collectively be below pre-earnings consensus estimates for those quarters, and down about 2.5% annually. And though it’s possible that this guidance is conservative, management made it clear on the earnings call that they expect 2020 revenue to be more weighted towards the first half of the year than is normally the case.

Intel did give a few non-AMD reasons for this expected growth slowdown -- specifically, lower modem sales, softer business PC demand and slower cloud server capacity growth. But it also mentioned -- in remarks that were widely seen as a reference to AMD -- that it expects an “increasingly competitive environment” as 2020 progresses.

Also, while Intel offered encouraging comments about its 2020 production ramp for current and next-gen notebook processors relying on its 10-nanometer (10nm) manufacturing process node, which is competitive with the 7nm Taiwan Semiconductor  (TSM) - Get Report node used for AMD’s latest PC and server CPUs, there was no mention of when Intel will ship its first 10nm desktop CPUs. While Intel has promised it will ship 10nm desktop CPUs, it hasn’t yet given an ETA (there’s some speculation that a platform codenamed Alder Lake, which is expected in 2021, will include desktop products).

In addition, though Intel reiterated that it will begin shipping 10nm server CPUs at some point during the second half of 2020, CEO Bob Swan indicated that Intel’s 2020 10nm volumes will skew heavily towards notebook processors. And though he promised that 2021 would be very different, Swan said that Intel “won't have a huge percentage” of its total second-half production volume come from 10nm products.

AMD, meanwhile, is well into ramping shipments for the 7nm desktop and server CPUs that launched last year, and is three weeks removed from unveiling its first 7nm notebook processors. Also, AMD is expected to launch next-gen desktop and server CPUs at some point during the second half of 2020. The chips will rely on a meaningfully improved CPU core microarchitecture known as Zen 3, as well as a more advanced 7nm TSMC process known as N7+.

All of this drives home why Intel’s remarks about expecting an “increasingly competitive environment” weren’t idle talk. It also provides some context for a recent report stating that Intel plans to cut PC CPU prices during the second half of 2020.

To some degree at least, Intel’s implied guidance for the last three quarters of 2020 demonstrate that its fight with AMD is something that investors still need to keep in mind when evaluating its growth prospects.

And on the flip side, Intel’s strong Q4 results and Q1 guidance show why Intel/AMD market share numbers are far from the only thing that investors should be looking at when trying to gauge how much Intel will grow.