Source: Intel
Intel Corporation (INTC) is the worlds largest manufacturer of semiconductor products. Despite its size, it has achieved constant revenue growth with a five-year average growth rate of 5.57%, and accordingly its stock price near doubled in that same period. However, the slowdown of the PC market poses a risk to the companys continued growth as most of its revenue is derived from its CPUs. Fortunately, the company had foreseen this and accordingly expanded into the data centre space, which is the companys current focus. Looking further ahead, Intel has already laid the groundwork with several high growth segments to ensure its future growth will be fulfilled.
While many companies seek to diversify their revenue for additional growth, few have the scale and resources that Intel do. Additionally, we found reasonable indication that the company could rapidly scale in these newer businesses. We had to look no further than Intel itself, looking at its rapid expansion into the second largest segment, Data Center Group (DSG). The three main success factors identified were:
Intel had used these strengths to their advantage when diversifying to DCG and we expect it to take full advantage of them to expand into its newer segments.
Revenue Segment
$ mln
% Revenue
Growth Driver
Client Computing Group (CCG)
37,146
51.39%
Past
Data Center Group (DCG)
23,481
32.49%
Present
Non-Volatile Memory Solutions Group (NVMG)
4,362
6.04%
Present/Future
Intel Security Group (ISG)
313
0.43%
Present/Future
Internet of Things Group (IoT)
3,821
5.29%
Future
Programmable Solutions Group (PSG)
1,987
2.75%
Future
Automated Driving Group (ADG)
879
1.22%
Future
All Other
289
0.40%
N/A
Source: Intel
Intels business segments can be viewed as a representation of three different timelines of growth. In the table above, we labelled the time period in which these segments serve as the main growth driver to Intel. Before getting into Intels newer high growth segments, we explain why Intels Client Computing Group (CCG) has seen its best days gone past.
Intels largest segment, the Client Computing Group (CCG), is a representation of Intels rich history in CPUs spanning back to 1968. As the inventor of the x86 series of CPUs, it holds the worlds largest market share of CPUs. This segment undoubtedly made Intel into the giant it is today. The PC-centric CCG accounts for revenue from mostly notebooks and desktops. As mentioned, personal computer unit sales have been on a decline which does not bode well for Intel. Its three largest customers; Dell Technologies Inc. (DELL) (16% of revenue), Lenovo (OTCPK:LNVGY) (12%) and Hewlett Packard (HPE) (11%) also happen to be the three largest PC-makers in the world by market share, as seen below.
Source: Statista
With PC unit sales decreasing by an average of 4.09% annually since 2012, we expect this trend to further continue as PCs' lifespans continue to increase, with current life spans reaching 5-8 years. This is supported by PC vendors that are becoming increasingly competitive by offering better after-sales service such as maintenance, repair and upgrade services. According to data from Statista, the decline in terms of unit sales for Intel has been occurring since the end of 2016, with Intel not only losing unit sales due to the overall PC market but also due to loss of market share to Advanced Micro Devices (AMD).
Over the last few years, AMD has seen a strong recovery in the PC market, with the launch of Ryzen and Epyc CPUs. AMDs CPUs not only offer better multi-core performances, but sell for much lower prices as identified:
Intel CPU Average Selling Price
AMD CPU Average Selling Price
$735.65
$322.20
Source: CPU World
Besides AMD, new ARM-based processors by Arm Holdings (owned by SoftBank (OTCPK:SFTBY)) have proven to be worthy substitutes with some of Intels top customers, including Lenovo and HP having released ARM-based laptops. Surprisingly, Intel has managed to maintain a slight revenue growth by increasing its average selling prices. However, as Intels CPU prices already significantly outprice AMDs, we do not see a sustainable way for Intel to increase its revenue for this segment.
In the last earnings call, Intel CFO George Davis guided for low single-digit growth for its PC-centric segment. However, we feel this is overly optimistic. While the COVID-19 pandemic has created temporary tailwinds for PCs as people are mandated to work from home, this will normalize towards the end of the year. Additionally, consumers become much more price sensitive in recessions, and AMDs more affordable processors provide much better alternatives. Considering this, even after accounting for an increase in average selling prices for Intels CPUs, and a temporary increase in unit sales for this quarter, our calculations show revenue for CCG will decrease in the long term.
Around the same time that PC sales started to decline, Intel began rapidly scaling in the data centre space by supporting its core PC customers and other cloud players in providing chips for the computing power requirements of their data centers. This brings us to the present.
While Intel has exposure to millions of end-consumers through its PC customers, Intel only has a few direct customers itself. The nature of the semiconductor industry means chipmakers like Intel control most of the chip supply to large OEMS (smartphone manufacturers, PC manufactures, automakers, data centre companies and e-commerce platforms). This explains how just 3 customers (PC manufactures) make up 39% of Intels $71.9 billion revenue.
This also means Intel can very quickly gain access to large buyers. Intel did just that by leveraging its existing CCG customers such as Lenovo and Dell to rapidly grow in the DCG space over the past 5 years, as seen below.
Source: Intel
Intel continued to build on these existing customers by offering newer products from its portfolio. For example, Intel recently announced a multiyear agreement with Lenovo to provide its server chips for High Performance Computing and AI workloads. By building onto its product portfolio, it gained newer customers in the cloud space such as Amazon (AMZN), Microsoft (MSFT), Alibaba (BABA) and Google (GOOG) (NASDAQ:GOOGL). Microsoft utilizes Intels Xeon Scalable processors in its Azure cloud servers, while Chinese e-commerce giant Alibaba deploys Intels processor and memory technology for its e-commerce website. Building on this, Intel is collaborating with Alibaba for the 2021 Olympics in Japan where Intel will power 3D Athlete Tracking Technology.
While Intel serves large players in this space, it does face some competition from AMD which has also secured some heavy hitters of its own, with orders from major players such as Dell, IBM (IBM) and Nokia (NOK). As such, while this segment remains Intels present focus, the company has taken steps to establish newer business segments through product expansion and acquisitions to secure its future growth.
We can see Intel doing well in its future segments, as it is already replicating the key drivers that made the DCG expansion successful: 1) leveraging existing customer relationships, 2) securing newer customers through its portfolio of products, and 3) riding the high growth of the markets.
Intel has built its broad portfolio of products outside of CPUs, to include GPUs, FPGAs and ASICs. This provides the opportunity for Intel to cross-sell its products to both existing and newer customers. Intel has already proved this by securing contracts with existing cloud service customers including Google, Oracle (ORCL), Cisco (CSCO), Dell and Lenovo for its Non-Volatile Memory Solutions Group (NSG) segment. Dell, which is Intels CCG and DCG customer, utilizes Intels 3D NAND Optane SSDs and its Xeon server processors making it a customer for yet another business segment. Intel has proven it can gain market share in new markets easily, despite the memory market being highly competitive with large memory players such as Samsung (OTC:SSNLF), Micron (MU) and SK Hynix (OTC:HXSCF).
Intel also grew its product portfolio inorganically through acquisitions. It acquired McAfee in 2011 which now forms its Security Group (ISG) segment, and recently it acquired Altera, specialised in field programmable field array (FPGA) to operate under its Programmable Solutions Group (PSG) segment and Mobileye, a developer of advanced driver assistance systems for autonomous vehicles to operate under its high-growth Automated Driving Group (ADG) segment. The main competitors to its ISG segment are Symantec (acquired by Broadcom (AVGO)), ESET, Bitdefender, AVAST Software, and Kaspersky Lab. Despite the competition, Intel had the advantage of a wide customer base of large enterprises to cross-sell McAfees security solutions. As PCs and anti-virus software go hand-in-hand, it was a no-brainer that Dell and HP would sell their PCs and laptops with McAfee software pre-installed. And of course, Intel takes the opportunity to also extend McAfee cybersecurity solutions to its DCG customers, Google and Microsoft.
Building on this, Intel managed to secure Microsoft into utilizing its Stratix FPGAs in Microsofts Azure cloud platform, configured to run deep learning models. However, Intel failed to rope all of its customers into FPGAs, as it faces strong competition from Xilinx, the market leader of FPGAs with about 65% market share. Xilinx enjoys a technological lead over Intel as its FPGAs are based on 7nm manufacturing process while Alteras are based on the 10nm and 14nm. Due to Xilinxs lead, it has managed to also secure cloud vendors Alibaba and Amazon (Intels DCG customers) to use its FPGAs.
While there is competition in the Autonomous Driving space from Nvidia (NVDA) and NXP (NXPI), ADG has been Intels fastest growing segment, increasing 26% Y/Y in 2019. Underlying this strong growth is its partnerships with automakers around the world. Intel recently announced a partnership with Chinese auto manufacturer SAIC. The addition of SAIC to its existing partnership with Nio will strengthen Intels foothold in the Chinese auto market.
The Internet of Things Group (IoTG) exemplifies Intels broad range of capabilities. For instance, Intel recently announced a partnership with The Sinclair, Autograph Collection owned by Marriott International (MAR), to build the worlds first digital hotel, by providing in-room sensors, Wi-Fi cloud networking solutions, PoE-powered and LED mirrors. There are more than 140 Autograph Collection properties globally. Should the partnership extend, we estimated a revenue of at least $45.9 million based on a total of 164 rooms per hotel with chip revenue of $2,000/room for Intel. While this is not significant, opportunities such as these were not previously thought possible. With the world becoming increasingly interconnected, the Internet of Things (IoT) has opened up a realm of possibilities and we see companies like Intel who have the capability to provide end-to-end solutions, being able to capitalize on these opportunities.
A potential opportunity we see for Intel is through continued support for Microsofts Azure platform with its new technologies in AI, machine learning and edge computing workloads. Intel may have also already secured a huge partner for its new GPUs, as it hinted that it may supply its upcoming Xe discrete GPU accelerators to Lenovo. Additionally, should Intel jump up a manufacturing node for FPGA, it wouldnt be surprising to see Intel secure some of Xilinxs customers (which have longer established relationships with Intel). As exemplified, Intel has the capability to rapidly expand its newer segments through partnerships with both existing and new customers.
Lastly, while these newer segments currently only make up 16.12% of revenue, they operate in very high growth markets as seen below.
*4-year CAGR
**3-year CAGR
***1-year CAGR
Our model projected revenue growth based on overall market growths and industry competitiveness. It has also been seasonally adjusted while also taking into account the negative impacts of the coronavirus for the first half of FY2020. They further reflect the potential revenue opportunities that potentially exist in each segment based on emerging technologies and the presence of Intels customers overlapping in said markets.
Source: Intel, Khaveen Investments
Year
2014
2015
2016
2017
2018
2019
2020E*
2021E*
Revenue
56,574
55,329
59,054
63,572
71,993
73,188
83,718
83,023
Y/Y %
N/A
-2.2%
6.7%
7.7%
13.2%
1.7%
14.4%
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Intel: The Growth Story Continues - Seeking Alpha
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