It's a tale of two worlds for Intel INTC,
These days. In a turbulent time for the silicon industry, the computer chip giant reported late Thursday that fourth-quarter 2023 revenue rose 10% year over year, with a gross margin increase of 6.5 points. However, for full-year 2023 results, total revenue was down 14% compared to 2022 and gross margin fell to 40% from 42.6%.
Compared to companies like Taiwan Semiconductor Manufacturing (TSM),
Or even Nvidia NVDA,
With gross margins of 54% and 73% respectively for 2023, Intel continues to struggle to find ways to manage costs.
But looking at quarterly or full-year 2023 results doesn't tell the whole story. Intel's two most important business units, CCG (customer products) and DCAI (data center and AI infrastructure products), could not be on more divergent paths.
Intel's customer group is its cash cow, the part of the company that continually provides revenue and dollars to operate and grow new business units and product lines. Looking at the client group's operations in the fourth quarter of last year, things look amazing. Revenue rose 33% and operating income jumped more than 450%, with operating income increasing from $500 million to $2.9 billion compared to the same quarter last year. The company called a “healthy alignment” with the inventory position that has been a cause of concern over the past two years as one of the main reasons for the shift.
This paints 2024 as a potential growth opportunity for customer products, including laptop and desktop CPU chips. Intel launched its new chipset, called Core Ultra, for the AI PC market last month, with some systems available from partners including Dell and HP before the holiday, and several more coming this quarter. Intel's ability to grow its customer portfolio's profits depends largely on momentum and consumer excitement toward adopting PCs with this new AI capability.
Many industry analysts are calling for a “super cycle” of PC upgrades in the second half of 2024 as more software and interesting consumer use cases move AI computing from the cloud to your local PC. Right now, I see demand for AI PCs being fairly weak. Looking at the enthusiastic tech crowd, an indicator I generally consider to be the leading indicator of tech trends, there is very little interest in “AI for the sake of AI” and instead I see a sense of patience for that “wow” moment to trigger the buying cycle. I am confident that will happen.
Intel isn't the only player in the AI PC space. Both AMD AMD,
and Qualcomm Qcomm,
It has very good chips with integrated AI accelerators, and interesting startups like MemryX are offering additional AI chips, so Intel will have to compete on performance and flex the power of the channel effect to create the best software ecosystem for its parts in order to stand out.
“We've moved past the point of simply ignoring it with a “better luck next time” mentality. “
If last quarter's results offer a lot of optimism for Intel's client side, they bring an equal amount of questions for its data center and AI infrastructure business unit. Year-over-year revenue was down 10% and operating income was down 38%, with an operating margin of 2%.
The company commented in a press release that the “addressable CPU market” was shrinking and that there was significant competitive pressure on profits. However, we have moved beyond the point of simply ignoring it with a “better luck next time” mentality. Intel's Xeon CPU is still the dominant market leader in data center CPU chips, even with the likes of AMD and its Epyc line of chips making inroads. But clearly this is not enough to grow a business.
Intel's data center group is having trouble executing a plan to capitalize on the artificial intelligence computing craze. While Nvidia's stock has soared to $1.5 trillion, Intel's data center GPU products have yet to gain a foothold. And while Gaudi's line of AI accelerators looks good on paper and in the limited benchmarks available, there are no major design wins or partnerships that suggest a flood of sales will occur anytime soon.
Considering that AMD expects its MI300 AI server chip revenue to reach billions of dollars for 2024, it's incredibly worrying that Intel isn't showing a plan to address that. The company announced a change in leadership for this business unit this month, and while this is a needed move, it is not an immediate enabler to solve the AI issues Intel is facing.
is reading: Did you miss the boat on AMD stock's rise? Why does this analyst say that you are not far behind?
During Intel's earnings Q&A call, CEO Pat Gelsinger noted that Intel's focus on AI in 2024 will be more on AI inference rather than training, activating and using AI models rather than creating or building new ones. If the market moves this way and needs to adopt a slightly different infrastructure base to achieve this, it will rely more on Intel's strengths.
Additionally, Intel CFO David Zinsner told analysts on Thursday that there is a “$2 billion pipeline” for its “discrete accelerator portfolio” for 2024. This is a positive sign that Intel can still make progress in AI for data centers. This year by producer Gaudi. The pipeline doesn't resemble official revenue forecasts or a much-needed customer announcement, but it's a more positive sign than anything that appeared in the company's earnings statements.
The company's previously vaunted Networking and Edge (NEX) business unit saw revenue decline 24% year over year and operating income fall to a rounding error of zero. The Foundry Services (IFS) business increases revenue to $291 million (up 63% year over year) but is still bleeding cash as the company spends capital on new facilities and partnerships.
This year will be telling for Intel and how it will move forward in the second half of the decade. Can this once-invincible tech giant get back on its feet with Gelsinger's help and deliver manufacturing and product excellence? Or will it continue to get beaten by Nvidia, AMD, or even Qualcomm — companies that until recently were just flies buzzing around its head?
Ryan Shrout is president Signal65 And founder in Schrott Research. Follow him on X @rianshrot. Shrout has provided consulting services to AMD, Qualcomm, Intel, Arm Holdings, Micron Technology, Nvidia and others. Shout owns shares in Intel.
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