AMD, Intel And The Spectre Of A Looming Opteron-Style Meltdown

First published in August 2018

20 Aug 2018

EXECUTIVE SUMMARY

Advanced Micro Devices and Intel both announced their Q2 2018 earnings recently and both reported record results. While AMD's outlook was lack-lustre, Intel raised full-year guidance for the second time in the space of three months to a new all-time high of $69.5 billion, close to ten times what AMD is likely to achieve in 2018. 

In the intervening period, AMD's share price has gained ~25% while Intel is down ~7% indicating a broad shift in sentiment away from Intel and in favour of AMD. While both Intel and AMD are shaping up for a record 2018, negative catalysts are accumulating for Intel in 2019 and beyond. The elephant in the room, Intel's long-delayed move to its 10nm process, was largely ignored in the latest conference call. Meanwhile, AMD's move to TSMC's 7nm process remains on track for volume shipment of server CPU's in 2019. 

Unluckily for Intel, there's a second elephant in the room that gets less attention but is equally important. AMD has taken a different architectural path to Intel, that of integrating multiple smaller cores using its Infinity Fabric. Intel remains entrenched in a monolithic die architecture where additional cores make for larger die. While this approach has served Intel well for the past decade, its effectiveness diminishes as core count increases. Much like AMD was the innovator that led the industry from its higher-frequency obsession to first dual and then multi-core CPU's over a decade ago, we believe they are again on the cusp of an architectural transformation of similar, if not greater, magnitude.  

Intel is fortunate that demand for their products is exceptionally strong this year. Full factories on 14nm help to mitigate the gross margin impact of a much-delayed 10nm volume ramp for now. In other matters, Intel is less fortunate. The company's failure to ramp its 10nm process on schedule combined with what we believe is an architectural misstep of epic proportions has created a situation reminiscent of the famous "Opteron" cycle just over a decade ago. The similarity now with what happened back then has not been lost on certain analysts with the comparison being made twice in recent public forums.

That so-called "Opteron Cycle" found Intel on the back foot in the face of a superior, multi-core server product from AMD, resulting in their server market share growing to ~25% by early 2006 with the company's share price soaring from $11 in August 2004 to over $40 by February 2006 as a result. Not surprisingly, Intel's share price headed in the opposite direction, dropping from ~$35 in January 2004 to $17 in July 2006. Based on their current trajectory, we expect AMD to increase its share of the server CPU market from its current paltry 1.5% to 5% by Q4 2018 and to greater than 25% by Q1 2020.