Over the last few weeks, quite a few PC industry firms and outside observers have reported seeing meaningful shortages of Intel PC CPUs, which (in spite of recent share gains by AMD (AMD - Get Report) ) still go into the lion's share of the world's desktops and notebooks. There appear to be a pair of culprits:
- Demand for Intel's CPUs has been higher than expected, thanks to a strong enterprise server upgrade cycle, rising cloud capital spending and improved business PC demand. And amid this backdrop, Intel appears to be prioritizing sales of server CPUs, which carry higher average selling prices (ASPs) and are a long-term company priority, relative to sales of PC CPUs.
- Major delays for the arrival of volume production for chips relying on Intel's next-gen 10-nanometer (10nm) process node have restricted Intel's output. Two weeks ago, JPMorgan analyst Gokul Hariharan said Intel may have converted some of the capacity it has for its mature 14nm process node to 10nm. PCs featuring 10nm Intel CPUs aren't expected in volume until the 2019 holiday season, and 10nm server CPUs aren't expected until 2020.
Intel appears to be pulling out all the stops to ramp up its 14nm output. Among other things, the company has shifted the production of some motherboard chipsets to its older 22nm process node, and has been reported (without confirmation) to have outsourced some 14nm production to top chip contract manufacturer Taiwan Semiconductor (TSM - Get Report) .
Nonetheless, the shortages, which have arrived ahead of the seasonally strong fourth quarter, don't appear likely to go away quickly. Last week, Fubon Research, a Taiwanese firm that's affiliated with Jefferies, estimated that Intel will undersupply the PC CPU market by 15% between Q4 2017 and Q2 2018. And this week, the CEO of Compal Electronics, a major notebook contract manufacturer, stated supply constraints for Intel CPUs are unlikely to ease until the second half of 2019.
To be fair, others have been a little more optimistic. Last week, Micron Technology (MU - Get Report) , which partly blamed its below-consensus November quarter guidance on PC CPU shortages, said it expects the shortages "to be short-term," albeit while cautioning they could last beyond the November quarter. A seasonal drop in demand in early 2019 could improve the situation.
Still, for now, the shortages clearly represent a big headache for Intel, and spell some downside risk for its near-term analyst estimates. For the moment, the consensus among analysts polled by FactSet is for Intel's Client Computing Group (CCG), which is responsible for its PC and mobile chip sales, to see revenue rise 5% annually in Q3 and 3% in Q4.
On the flip side, the shortages are a boon for AMD's PC CPU business. While the loyalty of many business PC buyers to Intel could limit its share losses a bit, it's not far-fetched to imagine other would-be buyers of Intel-powered PCs turning to AMD -- particularly since AMD, thanks to its 2017 and 2018 Ryzen CPU launches, is on much better competitive footing than it was in prior years.
And if the shortages extend into 2019, they could act as an extra tailwind for the launch of AMD PC CPUs relying on TSMC's 7nm process, which is seen as roughly on par with Intel's 10nm process. AMD has already begun sampling 7nm server CPUs and GPUs, and (though it hasn't shared a launch date yet) it wouldn't be surprising to see the company ship 7nm PC CPUs in the first half of 2019.
But while AMD's PC CPU business benefits from the Intel shortages, AMD's PC GPU business, much of which involves GPUs going inside of systems containing Intel CPUs, could be hurt. Nvidia's (NVDA - Get Report) PC GPU sales could be hurt in a similar way, but the recent launch of high-end graphics cards containing the company's new Turing-architecture gaming GPUs should help prop up its sales, especially since many of these cards will be bought by gamers on a standalone basis.
HP Inc. (HPQ - Get Report) , Dell, Lenovo and other big PC makers are naturally affected as well. JPMorgan estimates Intel's shortages could ding PC shipments, which were estimated by research firm IDC to have grown 2.7% annually in Q2, by 5% to 7% in Q4.
Meanwhile, DRAM makers such as Micron, Samsung (SSNLF) and SK Hynix are hurt both by the direct impact of the shortages on their PC DRAM sales, as well as by the risk that reduced demand will hurt DRAM prices, which have shown signs of softening a bit following a huge two-year rally. This week, research firm DRAMeXchange forecast DRAM prices will drop by 5% sequentially in Q4. That's a little worse than a prior forecast for a 1% to 3% drop, albeit just a fraction of the giant price increases -- made possible by the efforts of DRAM makers to keep a lid on supply growth -- seen since the fall of 2016.
Intel's Q3 earnings report, along with the arrival of Q3 PC sales data from IDC and Gartner, should give us a better understanding next month of just how much damage is being caused by Intel's shortages. For the moment, it looks as if analyst estimates don't fully account for the problem's impact on Intel...and perhaps also its impact on some other firms.