Analyst Dylan Patel’s dim view of Intel and the chip industry downturn

One of the dimmer views of the global chip industry in 2023 and more specifically Intel comes from Dylan Patel, chief analyst at SemiAnalysis in Los Angeles.

On the brighter side, AMD is ascending in data center chips, he and others have noted, which might become more clear Tuesday when the company reports quarterly earnings.

Along with being strikingly direct, Patel qualifies as one of the most intellectual in the chip field, with his mastery of AI and quantum tech principles and insights into other future semiconductor capabilities.

Last week, Patel was relentless in assessing Intel’s 4Q earnings bomb: “Holy moly, Intel,” he wrote on Twitter. “Gross margins are now 39.2%...Reminder, Intel used to get 60% gross margins.”

“It cannot be understated how bad Q1 will be” for Intel, Patel continued. “They will burn billions, while doing layoffs, and canceling long-term investments, yet they continue to pay the dividend. Ridiculously short-sighted from management.”

For his insights on AMD, which reports earnings on Tuesday, Patel told Fierce Electronics to watch how much AMD leaves the PC market and, by comparison, how much share they have taken in the data center chip space. 

“In the PC market, Intel is going for an extreme price war, and in many ways, AMD is not competing,” Patel said. “OEMs say AMD is not offering near as many incentives or price reductions to fight Intel.”

“On the data center side, AMD is gaining share rapidly and Intel can’t discount enough to win in many cases because AMD simply offers more performance at much better efficiency which makes up for any price difference,” Patel told FE.

 “In fact, AMD has been charging more for data center chips than Intel has for over a year now,” Patel added. “This trend is only accelerating with the newly released AMD Genoa which has a hefty price increase to accompany its huge performance and power improvements. Despite this, Genoa is completely sold out and will remain sold out for a while.”

Big picture view

For the overall chip industry, Patel’s commentary is equally remarkable and direct. In a lengthy inventory analysis of 71 chip companies over 25 years released just days ago, Patel remarks on the widely-anticipated chip industry downturn in 2023 this way: “Our analysis points to a downturn far worse than companies in the industry and Wall Street expected.” 

It should be noted: the highly-regarded World Semiconductor Trade Statistics is forecasting a 4% decline in global semiconductor revenues in 2023, but analysts see this downturn as part of a historical up and down cycle that will lead to a higher year in 2024.

Patel went on, however: “The current semiconductor cycle will be more drawn out and deeper than most expect.  Due to this, we believe there is a 15% downside for semiconductor companies’ valuation or significant sideways movement before the real bull run can start.”  He predicted the current cycle will be long than six months.

Most semiconductor companies are noting in the current earnings season that they face an inventory correction in Q1 that can last, perhaps, well into 2023.  As noted many times by Fierce Electronics and elsewhere, this inventory correction comes after the market disruptions of the pandemic where shortages of chips then led to increased production and greater inventories, even as some chip buyers realized demand was slowing, especially for smartphones and personal computers.

The volume of chip inventories is currently at all-time highs, Patel wrote. “Even higher than the dot-com bubble and 2008 financial crisis. This inventory will take a lot longer than two quarters to digest. While companies want to hold higher inventory levels to avoid future supply disruptions, this growth level is unsustainable. Clearly these record inventory levels will take low utilization rates for more than a few quarters. Days of inventory [a measure of inventory volume] will keep growing in the A4 quarter for nearly every company based on our channel checks.”

Analyzing data center market for chips

While many industry publications and analysts will look only at how chip supplies affect PCs and smartphones, some of the most interesting developments in 2023 will come with high performance chips, including accelerator GPUs that are used in AI applications, usually in data centers and cloud. Some AI applications are at the edge, as well, in cars and other IoT devices, but tracking data center chips is more clear cut, as with the example of tracking Intel versus AMD on their server chip performance.

Patel did a head-to-head analysis of AMD versus Intel last October that showed AMD’s data center chip share more than doubled in two years from 2019 to 2021, with Q2 2022 data center revenues of $1.3 billion. Meanwhile, Intel saw Q1 2021 revenues in data center at $4.8 billion, which rose and then fell back to $4.6 billion in Q2 2022.  AMD may have reached 20% market share in data center products in 4Q 2022 once final numbers are available, Patel said.

Allied Market Research put the global data center chip market at $7.7 billion in 2017, and projected it to double to $15 billion by 2025.  The key players are Intel, GlobalFoundries, AMD, TSMC, Samsung Electronics, Arm, Broadcom, and Nvidia.  AMD purchased Xilinx a year ago, on Feb. 14, 2022.

IDC analyst Shane Rau recently released Q2 2022 data center numbers showing Intel still held onto 50% of the $9.7 billion market, with AMD at nearly 16% and Nvidia at 26%.

Meanwhile, Lucas Keh, an analyst at Third Bridge, described AMD as the biggest competitor for Intel in the data center market.

Keh said the Sapphire Rapids chip from Intel is designed to take the data center fight to AMD but his discussions with industry experts show customers are still worried about inconsistencies in delivery.  Intel had to remove features from Sapphire Rapids to finally deliver it, he said. “The data center market continues to slide for Intel and the outlook for PC sales is deteriorating,” Keh said.

To sum up, Intel CEO Pat Gelsinger places big hopes on Sapphire Rapids in 2023, but as Patel and some other analysts note, Q1 appears to be headed south for Intel more broadly. What happens to the rest of the chip industry will play out over many months to define whether 2023 is another down year in a historical pattern or drawn out over a longer period.

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