Intel – Rising Tide

CPU tide floats all boats

• Intel is feeling the benefits of its 10% shareholder, as the White House has announced a foundry deal with Apple, which, combined with recent recruitment and CPU demand in the data centre, is making the sceptics come back for another look.
• According to the White House, Intel has won a manufacturing deal with Apple, but Intel will need to match the yield and cost of TSMC if it wants to keep Apple as a customer.
• Intel has also recruited Alex Katouzian from Qualcomm to run its device business and now Seok-Hee Lee from SK Hynix to run its contract chip manufacturing business, both of whom I think would not have taken the job if they thought that Intel could not be turned around.
• This is a big vote of confidence, which combined with the sudden explosion of demand in the data centre for CPUs is going to mean that in the short to medium term, Intel is going to do a lot better than in the last two years.
• Despite this, Intel still has a fundamental problem which is that in every segment that it addresses with its chips, Arm has now been validated as being at least as good (and in some cases better) and much more power efficient.
• This was a major theme at Computex where Intel’s competitors and even some of its partners gave x86 a lashing on stage against which Intel failed to put up very much resistance.
• This is the key issue for Intel, but the good news is that the short-term demand that it is going to see over the next 12 to 24 months is likely to generate a lot of cash.
• I don’t think this is a sign that x86 is all right after all, but more a function of customers needing CPUs now and Intel being the current leading supplier with product to sell.
• Intel’s boat will rise on the tide of CPU demand, giving it the opportunity to invest the proceeds in addressing the obsolescence issue.
• This it must do, or when demand normalises, and supply catches up, the market may move much more quickly to Arm in both client and server, leaving Intel stranded.
• I have no idea how this should be fixed or whether Intel simply becomes a US-based foundry, but the current valuation of the shares is pricing in one of the greatest turnarounds in US corporate history.
• Hence, I remain pretty sceptical on that turnaround, and so I remain cautious on the shares, but given my hideous track record on predicting Intel’s share price, don’t take my word for it.