Last month semiconductor giant Intel (NASDAQ:INTC) announced its acquisition of Cray Inc’s (NASDAQ:CRAY) world-class interconnect personnel and intellectual property business for $140 million. Intel has been looking to build its high performance computing portfolio through faster processors and quicker interconnects.  In July 2011, it bought networking vendor Fulcrum Systems in order to build its data center portfolio and, in January 2012, it acquired InfiniBand assets from Qlogic (NASDAQ:QLGC) to build a chip-to-chip and server interconnect.

See our complete analysis for Intel

Cray, a global leader in supercomputing, provides innovative computing platforms and has made a name with its XT5-HE supercomputer (also called Jaguar) touted as the third largest supercomputer in the world, according to the Top500 list of fastest supercomputers issued in November 2011. ^[1]

Intel has entered into a definitive agreement with Cray to acquire certain assets related to its high-performance computing (HPC) interconnect program, which is an important segment of the server market. The transaction, expected to close by the end of the current quarter, provides exceptional strategic assets and further enhances Intel’s HPC portfolio.

After a huge market share loss in 2006, Intel bounced back with its Xeon processors and currently leads the server market with a share close to 95%.  Cray’s assets are expected to drive up its server processors performance while reducing power consumption.

Intel has seen a substantial increase in its server market share from 85% in 2007. However, we believe it will witness a slight downtrend here on for the following reasons:

AMD looks to regain share

AMD (NYSE:AMD) over the years has lost a significant portion of its server market share to Intel. Keeping in mind recent events such as  its collaboration with HP for networking solution & server technologies and the recent acquisition of SeaMicro, we see AMD regaining some of the lost market share from Intel.

Entry of ARM-based players in server market

ARM-based players, that are mainly into PC microprocessors, are also likely to enter the server market. This will lead to increased competition that can erode Intel’s market share.

The technology and expertise gained as a result of the recent deal with Cray will help Intel build its high-performance computing portfolio as it looks to scale its server performance. However, we are of the view that though Intel will continue to dominate the server market, it could see a slight y-o-y decline in its server market share and will hold around 80% share by the end of our forecast period.

You can change the market share value in the chart above to see how the change affects our $30.82 price estimate for Intel.

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1. Intel acquires HPC interconnect assets from Cray, Computer World, April 24, 2012 [↩]