Why Intel’s competitive advantage crumbles

Intel (NASDAQ: INTC) is the largest disk maker in the world, with products ranging from personal computers to data centers. Currently, the company is also the leading provider of central processing units (CPUs) for laptops, desktops and servers. But competition from chipmakers like ARM, Advanced micro-devices (NASDAQ: AMD), en NVIDIA (NASDAQ: NVDA) has put pressure on Intel over the past few years, and it’s starting to take its toll on the iconic company. This is why investors should be concerned.

Competition with customers

Intel’s chips are built on the x86 instruction set, a fundamentally different architecture than ARM’s chips. The difference between the two is simple: Intel’s chips are made for performance, and ARMs are designed for efficiency.

However, ARM’s chips also offer a level of customization that Intel cannot match. This is because Intel sells its chips directly, while ARM licenses its CPU architecture to partners. This has enabled various technology companies to build on ARM’s energy efficient architecture and add their own customizations to improve performance. In fact, from November 2020, the most powerful supercomputer in the world will be on custom ARM-based processors.

Two years ago, Amazon began using its own ARM-based Graviton processors to replace Intel chips in Amazon Web Services data centers. For comparison, Amazon’s custom chips offer up to 40% better price performance than Intel’s. Apple recently made a similar decision, replacing Intel chips in its MacBook Air and MacBook Pro laptops with its own M1 chips. These custom ARM-based processors actually surpass the performance of Intel’s latest Tiger Lake laptops CPUs. And just a few weeks ago, Microsoft followed suit and announced that it would be designing its own ARM-based chips for its data centers and Surface PCs.

This is bad for Intel. The company is losing customers in markets it previously controlled, such as data center and computer, as buyers’ preferences change. Companies want personal solutions, and Intel’s current products cannot offer them.

Competition with NVIDIA

For years, Intel’s Xeon processors dominated the data center market. However, NVIDIA has also become a critical player in this space, as its graphics processing units (GPUs) are much better at accelerating heavy workloads such as artificial intelligence. In fact, NVIDIA’s recently introduced Ampere GPU is up to 237 times faster than Intel’s CPUs.

In 2020, NVIDIA doubled its data center business and acquired network solution provider Mellanox for about $ 7 billion. Compared to Intel’s products, Mellanox’s network solutions offer better performance and consequently have a larger market share. For NVIDIA, the acquisition has already enabled the company to combine its GPUs with Mellanox technology to create products such as the BlueField-2X DPU, which features a Mellanox SmartNIC (network interface card) with ARM CPU core and AI enhances capabilities of NVIDIA’s GPUs. In other words, NVIDIA can combine its accelerators and network products, which increase data center security and efficiency. Not only does this fit the trend toward high-performance networking in data centers, but it also distinguishes NVIDIA’s offering, as Intel does not have a similar product.

Even worse for Intel, NVIDIA has announced plans to acquire ARM. If approved, it will combine NVIDIA’s best accelerators, Mellanox’s high-performance network and ARM’s energy-efficient CPUs. And although ARM processors today have only a small share of the data center market, NVIDIA’s focus on R&D could help ARM produce a server CPU that further displaces Intel from data centers.

Competition with AMD

Over the past few years, AMD’s Ryzen chips have helped the company take away a significant market share from Intel in the market for laptops and computers. For desktops, AMD released its Ryzen 5000 Series chips in November 2020. Compared to Intel’s latest chips, the 10th generation Core CPUs codenamed Comet Lake, these Ryzen chips offer better performance across the board – games, single-threaded (light) computer, and multi-threaded (heavy) computer. However, Intel plans to launch Rocket Lake, its 11th-generation Core CPUs for computers, in the first quarter of fiscal 2021. This new technology can help the business regain lost ground.

In addition, AMD also participated in the server market (data centers) with its second generation EPYC CPUs, codenamed Rome. And Intel has not helped itself here – the company has delayed the launch of Ice Lake, a third-generation Xeon scalable server processor. This slide was originally set for production in early 2020, but management now says Ice Lake will only make headway in the first quarter of fiscal 2021. This could delay the launch of its next server chip, Sapphire Rapids, which is currently set for the end of 2021. If that happens, AMD could easily take it to use more of this market with the upcoming release of its third-generation EPYC CPU, codenamed Milan.

Data source: Mercury Research.

Intel’s financial performance

All of this competition put Intel under pressure, and it weighed heavily on the company’s financial performance. Overall revenue growth has been slow, with only 26% higher over the past three years, compared to NVIDIA’s 65% and AMD’s 71% growth. In addition, NVIDIA and AMD’s gross profit margins expanded, while Intel’s fell from 62% in 2017 to 53% in the last quarter, indicating a loss of price capability. Investors should keep an eye on these statistics going forward.

On the plus side, Intel continues to generate much more revenue than its competitors, which means the company has to spend more cash on operating and capital expenses. If Intel can make that advantage work, it may be able to restore its crumbling competitive advantage. However, given the strong performance of Intel’s competitors and the consequent weakening in Intel’s financial performance, I think investors should be wary of buying this stock.