Summary:
- During recent earnings commentary, Taiwan Semiconductor Manufacturing Company Limited suggested that AI chip sales are likely to cannibalize data center CPU sales in the short term—which could negatively impact Advanced Micro Devices, Inc. and Intel Corporation.
- The cannibalization of data center CPUs could be an unplanned headwind for AMD and Intel due to higher-than-expected AI accelerator sales from Nvidia.
- Cannibalization risk may be more significant for Intel due to AMD’s superior offerings.
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Taiwan Semiconductor Manufacturing Company Limited (TSM) (“TSMC”) reported Q2 2023 earnings on Thursday, July 20, 2023. During the earnings call, TSMC provided commentary on data center investments in AI and their potential to cannibalize data center CPU sales in coming quarters. In this article, I consider the potential implications of TSMC’s commentary for the Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC) server CPU businesses. I argue that the cannibalization issue could potentially lead to unplanned headwinds for AMD and Intel—with Intel potentially being hit harder.
The Commentary From TSMC
Responding to a question about AI accelerators cannibalizing server CPU demand, TSMC CEO C. C. Wei had the following response about AI chip demand and its likely effects on data centers:
“Our model is based on the data center structure. We assume a certain percentage of the data center processor are AI processors. And based on that, we calculate the AI processor demand. And this model is yet to be fitted to the practical data later on. But in general, I think the – our trend of a big portion of data center processor will be AI processor is a sure thing. And we can cannibalize the data center processors. In the short term, when the CapEx of the cloud service provider are fixed, yes, it will. It is. But as for the long term, when their data service, when the cloud services having the generative AI service revenue, I think they will increase the CapEx, that should be consistent with the long-term AI processor demand. And I mean, the CapEx will increase because of a generative AI services.”
Although the long-term forecast of increasing data center capex is positive for chipmakers, TSMC’s short-term forecast is somewhat ominous for the server CPU market. The server CPU market is generally expected to improve over the coming quarters as the ongoing inventory correction among cloud providers eases. AMD and Intel have been dealing with the issue for some time now. However, it would seem that this recovery could face headwinds as CPUs vie against AI accelerators for limited data center space.
Unplanned Headwinds Are Possible For AMD and Intel
Given that Nvidia Corporation’s guidance for Q2 surprised the entire market, one is tempted to ask if AMD and/or Intel may need to revise their expectations and commentary regarding server CPUs. The volume of shipments from Nvidia turned out to be much higher than expected, so cannibalization of CPUs in the data center may be progressing faster than they had anticipated. If so, the recovery of AMD and Intel’s data center businesses could take longer than expected—especially given just the sheer volume of AI accelerator sales Nvidia is seeing.
However, we will probably have to wait some quarters to see how significant cannibalization by AI accelerators turns out to be, since presumably data center plans cannot be turned around overnight. For the time being, AMD and Intel’s commentary on server CPUs has not changed since Nvidia’s last earnings report. At the Bank of America 2023 Global Technology Conference, AMD’s Senior VP & GM of Server Business Unit Dan McNamara seemed to maintain AMD’s forecast of 50% growth in data center from H1 to H2. Likewise, at the TD Cowen’s 51st Annual Technology, Media & Telecom Conference, Intel’s CFO David Zinsner stated that “we are seeing a little bit better data center performance than we had anticipated when we provided the guide.”
Still, the cannibalization issue makes logical sense, and has now been given further credence by TSMC. If data center capex is relatively fixed in the short-term (and presumably so are other things like physical space), then the explosion in demand for AI accelerators must crowd out something—with CPUs being the obvious mark.
Cannibalization Risk May Be More Significant For Intel Than AMD
AMD’s latest lineup of server CPUs based on the Zen 4 architecture seem to be significantly better than Intel’s offerings in terms of performance and efficiency. Response from customers also seems to be very strong, with Oracle going so far as to forego Intel completely this generation. Hence, it seems likely that AMD will not have much trouble selling its Zen 4 server chips. It seems logical that data centers would be more likely to direct their cuts at less performant, less efficient chips. These could include AMD’s outgoing Zen 3 server chips, although AMD is slated to phase these out over the next few quarters anyway. Hence, for AMD, cannibalization by AI chips may not be as significant of an issue.
For Intel, on the other hand, whose current-gen offerings are already inferior to AMD’s, things could get worse. Market share losses to AMD could further accelerate if data centers direct their cuts primarily at Intel’s chips. If AMD’s data center revenues grow while Intel’s shrink (or grow less quickly) due to cannibalization, then Intel’s market share could start to decline even more quickly than at present.
And since market share in the data center business tends to be very sticky, this short-term problem could potentially become a long-term headache for Intel as well. On the other hand, if Intel suffers more from cannibalization than AMD, then it is conceivable that AMD could even be better off in the long run—again, due to the stickiness of market share.
We will have to wait and see exactly how the cannibalization story plays out. Perhaps, in light of the commentary from TSMC, we will get an update from Intel or AMD in their upcoming earnings calls.
Conclusion
TSMC’s commentary on the cannibalization of server CPUs by AI chips warrants at least some concern from investors—with Intel’s situation particularly worrisome for the next few quarters. Investors should keep a close eye on the cannibalization issue in coming quarters, since it could significantly affect AMD and Intel’s recovery from their ongoing sales slump. It could also affect their long-term market share trajectories.
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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