Intel Deep Dive

Welcome to the 81st Pari Passu Newsletter.

After learning about Synethic PIK last week, today we are conducting a deep dive into one of the iconic leaders in the technology space, Intel.

Their iconic stickers that appeared on nearly every (minus Apple) laptop were a constant reminder of their dominance in the PC processor market. The company, under the strategic vision of CEO Andy Grove in the late 1980s, decisively pivoted from memory chips to focus on logic chips, marking a foundational shift that would define the computing era for decades. This bold move ushered in an age where Intel stickers became ubiquitous on laptops and desktops, cementing its status as the leading-edge chip designer through the '90s and 2000s.

However, Intel is no longer the semiconductor giant that we once knew. The changing dynamics of the semiconductor ecosystem, underscored by the significant CapEx investments from tech giants like Google, Microsoft, and Meta, highlight the critical importance of innovation and adaptability in sustaining leadership in the fast-evolving tech landscape. We will explore the reasons behind Intel’s drop in performance and its strategy for a potential turnaround.

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Overview - Semiconductors and Our Tech of the Future

In order to understand Intel, we must understand the semiconductor industry, a vital sector driving technological advancement worldwide. 

• It encompasses the design, manufacturing, and distribution of semiconductor devices, which serve as the building blocks of modern electronics 

• These devices include transistors, integrated circuits (ICs), and microchips, which power everything from smartphones and computers to automotive systems and medical devices

Key players in the semiconductor industry include corporations like Samsung, TSMC, NVIDIA, and, of course, Intel. An important aspect that dominates the industry is its highly cyclical nature with bursts of secular, dynamic innovation. 

• Global demand for semiconductors remains consistently high, with applications expanding into emerging fields such as artificial intelligence and 5G technology

• However, the industry faces challenges such as supply chain disruptions, geopolitical tensions, and environmental concerns related to semiconductor manufacturing processes

• Previous semiconductor cycles include the PC cycles, the dot-com cycle, and the mobile 3G, 4G, and 5G cycles

The AI boom, in particular, represents a "megacycle" within the semiconductor industry, characterized by its unparalleled amplitude. 

• Unlike previous cycles, the AI revolution is fueled by significant investment and exponential market demand growth

• This cycle is further bolstered by the robust balance sheets of leading tech giants such as Google, Microsoft, Amazon, and Meta

• These entities possess the financial wherewithal to self-fund their ventures, a stark contrast to the dot-com era, which relied heavily on debt financing and was plagued by unproven business models

• This foundational difference contributes to a cycle that is not only more sustainable but also likely to offer greater upside and longevity than those witnessed in the past

Currently, the AI market is fixated on graphical processing units (GPU). 

• While GPUs were historically designed for animation purposes, such as for video games, many of the Big Four tech companies have been purchasing huge orders of GPUs

• This is because GPUs are effective for processes required to train AI large-language models (LLMs). 

• How an AI model is trained makes all the difference in its performance. Given the current demand for GPUs, NVIDIA, a graphics chip provider, has benefited immensely [1]

The current cycle's distinctiveness is also underscored by the scarcity of fabrication capacity (fab capacity), which adds another layer of complexity to the industry's dynamics. 

• The combination of almost limitless financial resources chasing after an exponentially growing market, coupled with the strategic importance of semiconductor technology in enabling future innovations, sets the stage for a semiconductor cycle that is markedly different from its predecessors

• This new era in the semiconductor industry seems to be characterized by durability, significant growth potential, and an overarching impact that extends across multiple sectors, driven by the foundational role of semiconductors in powering the next wave of technological advancements

It's apparent that CPUs continue to represent a significant portion of the industry's revenue streams. 

• Yet, the evolving landscape, characterized by shifts towards graphics processing units GPUs, AI accelerators, and foundry services, signals a transformation in where future value may be concentrated

• Intel's journey from a peak revenue of $78 billion in 2021 to $54 billion in 2023, with reduced sales and operating margins, exemplifies the volatility and rapid evolution inherent in the semiconductor space

• The goal for Intel, as it navigates this transformative period, is twofold: first, to achieve a stabilization in market share and operating margins through cost reductions and strategic realignments; and second, to capitalize on emerging opportunities within GPUs and foundry services. 

• The projection for Intel's operating margins to recover to 25% by 2026, alongside aspirations for significant revenue contributions from its GPU and foundry segments, reflects an ambitious roadmap for reclaiming its industry prominence

The semiconductor industry's cyclical nature, accentuated by the current AI-driven demand surge, introduces both challenges and opportunities for Intel. 

• The AI accelerator market, potentially reaching hundreds of billions of dollars in the coming years, positions Intel's GPU and foundry ambitions within a context of immense growth potential

• This backdrop, combined with the stabilization and growth prospects of Intel's traditional CPU business, frames a narrative of transformation and resurgence for the company

Overview - How Intel Moves and Performance

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