Intel Is in Trouble as PC Demand Slumps
Intel (NASDAQ:INTC) is in hot water. That's not too surprising, considering it's been the story of the last few years for this stock. Over the last few years, the multinational computer company has struggled to hold its own against rivals such as Advanced Micro Devices (NASDAQ:AMD) in the semiconductor industry. The rivalry between the two companies is legendary, but AMD is closing the gap at a brisk pace.
Meanwhile, Intel has other things to worry about as well. Earlier this year, we saw a lot of market enthusiasm for semiconductors as the pandemic proved just how important chips are to the economy, and shortages drove up prices. This was a major reason the Biden administration pushed the Chips Act, promising to give subsidies worth $52 billion to bolster the local semiconductor industry and reduce dependence on foreign manufacturers.
Intel saw this as an opportunity to regain its lost fame as a chip producer rather than just a chip designer. However, things have changed quite drastically in a few months. It seems like the demand for silicon is quickly shrinking. It had risen exponentially when the pandemic struck due to supply issues, but as supply gets back online in China and economies around the world falter, we now face a supply glut and falling demand.
Intel is not immune to this. Amid falling demand for its PCs, the company is now cutting down on staff numbers to reduce costs per a Bloomberg report.
Macroeconomic issues are hurting Intel
Inflation has been increasing rapidly since the start of this year, with the CPI rising by 8.6% in May, the highest rate since 1982. Consumers feel the pinch as they're paying more for everything they need, from groceries to transportation costs, without any corresponding increase in their wages or salaries.
In this environment, consumers are scaling back their purchases, especially when it comes to large discretionary purchases. Gartner released a report earlier in 2022 on how computer sales dropped off recently. This is the first time computer sales showed such a large decrease since the research firm started gathering sales data in the mid-1990s.
Additionally, pandemic-era stimulus money caused a pull-forward in demand for many products. Now that the stimulus money has dried up, and inflation is rampant, Gartner expects smartphone and personal computer hardware sales to be down this year by 6% and 10%, respectively.
This is not great news for Intel, which needs cash to continue building two chip factories in New Albany, Ohio at a price tag of $20 billion. The company bet big on returning to the chip fabrication business.
AMD versus Intel
AMD is one of Intel's oldest rivals, and AMD has led the way in the industry recently, while historically, the advantage was with Intel. AMD's Ryzen series is proving to be a challenge to Intel regarding performance, price and power consumption.
In the past, Intel was the dominant player in the PC market. However, this advantage also rests with AMD at the moment.
AMD's enterprise, embedded and semi-custom segment is its revenue driver because of the server business and games console chips. AMD's computing, graphics and data center segments all have their own unique set of strengths. Ryzen processors provide impressive performance and an easy-to-use interface, while Radeon GPUs deliver excellent power efficiency when paired with FreeSync technology. In addition, AMD has acquired Xilinx to improve its supercomputers' performance. This increased power will allow it to compete more effectively with different rivals.
AMD's processors surpass Intel's, giving it the upper hand in the CPU market. Investors want to know if Intel has what it takes to regain the advantage. For now, the signs are not promising, as AMD continues outsourcing its chip production as part of an asset-light business model while Intel is diverting resources to the capital-intensive chip fabrication business.
According to Mercury Research, AMD grabbed a record 31.4% market share for x86 processors in August. Meanwhile, Intel experienced stock corrections which led to lower shipments. AMD managed to avoid this issue by increasing market share.
AMD saw revenue in the second quarter soar by 70% versus the year-ago period. The company saw success across all four major segments. However, during the same quarter, Intel suffered a 21.96% drop in revenue.
Intel has been an attractive stock for income investors due to a solid dividend, but many investors have left due to the company's lack of progress and a steep decline in value this year.
Overall, AMD's better performance indicates its upper hand in the CPU and GPU markets. It's beating Intel at what it does best. It appears to be the only company that could potentially unseat Intel from its position as the world's largest semiconductor chip designer by revenue.
Takeaway
AMD is managing to attract a wider range of customers looking for better performance and lower power consumption. Meanwhile, Intel has been trying to catch up with AMD, but AMD continues to take away market share from the largest chip company in the world.
Macroeconomic headwinds such as inflation are not helping matters. In the coming quarters, excess supply is a key issue Intel will have to deal with. It's a terrible time to be investing in a capital-intensive business transition, and yet that is exactly what Intel is doing, perhaps motivated in part by failure to keep up with AMD.
It will take a brave investor to take the plunge on Intel stock this year, as there are currently no signs that a turnaround is imminent. In fact, negative news keeps stacking up at every turn.
This article first appeared on GuruFocus.
