Intel Corporation (INTC) is pushing forward in the AI realm with a strategic partnership with International Business Machines Corporation (IBM). This collaboration marks IBM as the first cloud provider to deploy Intel’s Gaudi 3 AI accelerators across hybrid and on-premise environments. The aim is to offer improved control over the software stack and streamline workload management, enabling businesses to scale their AI initiatives cost-effectively while prioritizing performance, security, and resilience. This offering, slated for early 2025, holds the potential to spark further innovations in generative AI, unlocking its full potential.
Intel is also expanding its AI footprint to edge devices and personal computers through its Core Ultra processors, supporting over 100 software vendors and 300 AI models. The upcoming Lunar Lake architecture promises to revolutionize performance and energy efficiency with its advanced graphics and AI processing capabilities. Furthermore, Intel’s updates on its next-generation products across various enterprise AI segments, including the new Intel Xeon 6 processors and Intel Core Ultra client processors, reinforce its position as a leading player in the AI revolution. The company has introduced the Intel Gaudi 3 accelerator, accompanied by a suite of open and scalable systems designed for widespread AI adoption across diverse sectors. The Gaudi 3 accelerator, equipped with tens of thousands of interconnected accelerators via Ethernet, promises a significant boost in AI training and inference capabilities, enabling global enterprises to effortlessly deploy AI at scale.
However, Intel’s aggressive push to gain an early advantage in AI PCs has come at a cost. The company’s short-term margins have been negatively impacted by the shift of production to its high-volume facility in Ireland, where wafer costs are typically higher. Adding to the pressure, higher charges associated with non-core businesses, unused capacity, and an unfavorable product mix have also weighed on margins. Increased competition from rivals like Advanced Micro Devices, Inc. (AMD) and NVIDIA Corporation has further dented Intel’s profitability.
The geopolitical landscape, particularly the strained relationship between the US and China, poses a significant challenge for Intel. China, accounting for over 27% of Intel’s total revenue in 2023, is Intel’s largest market. China’s push to replace US-made chips with domestic alternatives is a major concern, further impacted by the recent directive to phase out foreign chips from key telecom networks by 2027. This highlights Beijing’s commitment to reducing reliance on Western technology amidst escalating US-China tensions. The US’s tightening restrictions on high-tech exports to China have spurred Beijing’s push for self-sufficiency in critical industries, presenting a dual challenge for Intel: potential market restrictions and increased competition from domestic Chinese chipmakers. The second quarter of 2024 saw revenue negatively impacted by the revocation of certain export licenses for consumer-related items to a Chinese customer. Additionally, weaker spending in consumer and enterprise markets, particularly in China, has led to elevated customer inventory levels. Management anticipates a reduction in inventory levels during the second half of the year, but expects soft demand trends to continue. Strict export control measures are likely to further impact market dynamics, resulting in subdued revenue growth in the near term. The client business is anticipated to remain flat or decline, while the data center and edge markets are expected to show modest growth.
In response to these challenges, Intel is reportedly undertaking a comprehensive review of its businesses. This includes exploring potential options, such as splitting its product design and manufacturing divisions, evaluating which factory projects should be terminated, and considering the sale of its foundry operating segment. This foundry division, responsible for manufacturing chips for external clients, incurred an operating loss of $2.8 billion in the recent quarter. Over the past year, Intel’s stock has experienced a decline of 39.8%, while the industry saw a growth of 110.3%, lagging behind its competitors. Earnings estimates for Intel have also been revised downward, reflecting a bearish sentiment surrounding the stock. While Intel’s innovative AI solutions hold great promise for the semiconductor ecosystem, the company faces significant headwinds. These challenges, coupled with declining earnings estimates and a negative investor perception, suggest that Intel may not be a favorable investment choice at this time.
