Intel Q2 2023 Earnings: Key Updates About The Impact Of AI
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Summary:
- Intel reported Q2 earnings yesterday, July 27, 2023, where it provided commentary about the expected impact of the AI revolution on its businesses.
- In the short term, Intel expects AI chips to cannibalize data center CPU sales.
- However, in the long term, Intel sees significantly improved prospects due to high expected demand for PC chips with AI capabilities and increased interest in Intel’s AI accelerator offerings.
Andy
Intel (NASDAQ:INTC) reported Q2 earnings yesterday, July 27, 2023. Intel beat expectations for the quarter, and provided a strong guidance for next quarter. In addition, Intel provided fairly extensive commentary about the expected impact of the AI revolution on its various businesses. In this article, I will analyze some significant takeaways from this commentary.
AI Chips Will Likely Cannibalize Data Center CPUs In The Short Term
Intel continues to struggle due to the ongoing semiconductor slump, and its Data Center and AI Group posted a negative operating margin. There may be some short-term headwinds as well. During the earnings call, CEO Pat Gelsinger expressed the following view of the short-term demand environment:
We do think that the next quarter, at least, will show some softness. There’s some inventory burn that we’re still working through. We do see that big cloud customers, in particular, have put a lot of energy into building out their high-end AI training environments. And that is putting more of their budgets focused or prioritized into the AI portion of their build-out.
This perspective aligns with a recent forecast by TSMC (TSM) that AI chips will cannibalize CPU sales in the data center in the short term. I discussed this in detail in a recent article titled “AMD And Intel: Data Center CPU Update From Taiwan Semiconductor’s Q2 Earnings.” It seems that Intel is roughly on the same page as TSMC, acknowledging that cannibalization by AI chips is a real issue and will affect data center CPU sales for at least the next quarter.
Despite these short-term challenges, Intel remains optimistic about its long-term prospects, particularly with the anticipated improvement in average selling prices (ASPS) as Sapphire Rapids chips gain traction. CFO David Zinsner noted that “the continued ramp of Sapphire Rapids contributed to [data center] CPU ASP improvement of 3% sequentially and 17% year-over-year,” attributing the increased ASPS to higher core counts and improved competitiveness. However, he also seemed to caution that margins might not see a significant uptick-margins are far more influenced by the success or failure of the new foundry model.
Looking ahead, Zinsner did note the potential for margin improvements with upcoming offerings in 2024, driven by more competitive products. Sierra Forest is planned for the H1 2024 and Granite Rapids for H2. However, given Intel’s history of delays on its roadmap for the past several years, we will have to wait and see if this actually happens. The performance of AMD’s (AMD) next generation of chips (Zen 5) is also a significant factor to consider and remains to be seen.
An AI-Driven Client CPU Supercycle?
Intel also came out with an extremely positive long-term outlook for its client computing business. CEO Pat Gelsinger stated that “we see the AI PC as a critical inflection point for the PC market over the coming years that will rival the importance of Centrino and Wi-Fi in the early 2000s.” It appears Intel, therefore, expects local AI acceleration to be a killer hardware feature that will prove extremely popular among consumers.
Intel’s optimism seems rooted in the idea that numerous upcoming AI applications will require or benefit from local AI processing due to factors such as latency, bandwidth, and cost structure. CEO Pat Gelsinger listed several AI applications that could benefit from local processing, including “real-time language translation in your Zoom calls, real-time transcription, automation, inferencing, relevance portraying, generated content and gaming environments, real-time creator environments being done through Adobes and others that are doing those as part of the client, [and] new productivity tools being able to do local legal brief generations on clients…”
Intel plans to introduce AI acceleration in its client CPU lineup with Meteor Lake this fall.
Of course, it is possible that Intel’s bullish forecast could be even more bullish for AMD, which already launched its first Ryzen AI chips earlier this year. This is yet another area where Intel needs to catch up. If AMD maintains its lead, the importance of AI acceleration in CPUs could potentially help it gain more market share against Intel (even if Intel’s client revenues still increase due to a significant upgrade cycle).
Intel’s forecast makes sense in theory, and it could materialize in coming years. Still, it is important to remember that we are still in the early stages of the AI revolution, and locally-processed client AI applications are in their infancy. It will take some time to see how this story plays out-whether Intel’s predictions are accurate, and what effect they may have on competitive dynamics in the industry.
For AI Accelerators, Short-Term Availability Is Potentially Very Valuable
Intel reported that it is seeing increased interest in its AI accelerator products, particularly its Habana Labs Gaudi chips. Gelsinger stated:
The surging demand for AI products and services is expanding the pipeline of business engagements for our accelerator products, which includes our Gaudi, Flex, and Max product lines. Our pipeline of opportunities through 2024 is rapidly increasing and is now over $1 billion and continuing to expand with Gaudi driving the lion’s share.
Gelsinger noted that this represents a 6x increase in opportunity pipeline compared to the previous quarter.
However, it is important to remember that a pipeline of opportunities is not the same thing as actual sales. But Intel’s update does indicate that Intel is at least making some inroads into the AI accelerator market.
Availability seems to be a key factor contributing to Intel’s expanded opportunities. In a previous article titled “Nvidia And AMD: AI Updates From Taiwan Semiconductor’s Q2 Earnings,” I had discussed how capacity constraints for CoWoS (chip-on-wafer-on-substrate) packaging at TSMC would likely limit Nvidia’s (NVDA) ability to meet the demand for AI accelerators for several quarters. Intel seems to be suggesting the same. Gelsinger noted: “Everyone is looking for alternatives. Clearly, the MLPerf numbers that we posted recently with Gaudi2 show very competitive numbers, significant TCO benefits for customers. They’re looking for alternatives. They’re also looking for more capacity. And so, we’re definitely engaged.”
Again, it is possible that this update from Intel might be even more bullish for AMD and its upcoming MI300 series of chips (set to launch in Q4), depending on their final performance. AMD has a longer history in this area and a much better recent history of consistent execution on its roadmaps, and so could meet with significant success in the current supply-starved environment.
Conclusion
The commentary from Intel about the impact of AI on its businesses is quite bullish, although in light of its recent history of execution slip-ups it remains to be seen to what extent Intel can capitalize on its opportunities. Still, given the beat this quarter, the good guidance for next quarter, and the improving prospects in the AI revolution, Intel does deserve some more optimism from investors. I am therefore upgrading Intel from sell to hold.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMD, NVDA, TSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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