ARM-TSMC Collaboration Will Threaten Intel’s Dominance In Servers

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Despite macroeconomic headwinds slowing down growth in the semiconductor industry, Intel (NASDAQ:INTC) managed to post strong Q2 2012 earnings with 4% y-o-y increase in revenues. (Read:Intel Weathers Soft PC Market With Healthy Q2 Results) The company has been dominating the PC and server processor markets for the last two decades and continues to hold a majority market share in both these segments. With the launch of Intel architecture based smartphone by Lava International, Intel marked its much awaited entry in the lucrative tablet and smartphone markets earlier this year. (See: Intel Dials Up $31 With Smartphone Push And Intl. Growth)

Entering the mobile computing space pitches Intel against ARM Holdings (NASDAQ:ARM.L), which controls the majority of the smartphones and tablets chip market. While Intel invades ARM’s turf by expanding its presence in the mobile devices market, the latter is all set to compete in PCs and server processors with its slated entry later this year. Last month, ARM Holdings moved a step closer to pose a stronger competition for Intel by announcing a multi-year agreement with Taiwan Semiconductor Manufacturing (TSMC) to produce low-power chips for servers and mobile devices.

ARM Holdings Extends Its Partnership With TSMC

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As per the recent deal, ARM Holdings will work with TSMC to optimize its upcoming ARM v8 64-bit architecture, aiming to launch SoCs at 20nm and moving toward 15nm in the near future. The processors will include TSMC’s finFET technology that are said to be higher performing and more energy-efficient than the current chips. The low-power chips will leverage 3D transistor technologies similar to Intel’s Tri-Gate architecture.

Intel’s Ivy Bridge processors, which features the company’s new Tri-Gate transistor technology produced on a 22nm process, is currently more advanced in design compared to competitor products from AMD (NYSE:AMD) and ARM Holdings. Both Intel and TSMC have been working on 3D transistor designs for more than a decade. But Intel was the first company to commercialize it although TSMC’s FinFET technology is similar to that of Intel’s.

ARM’s designs currently only support 32-bit computing. With the introduction of ARM v8, the company’s designs will not only get 64-bit compatibility but also have additional features that are important to data center environments. Thus, TSMC’s technology, when combined with the upcoming ARMv8 64-bit design, is expected to challenge Intel in the server and PC markets.

ARM Holdings claims that the collaboration with TSMC will not only help it close the technology gap, but also provide customers access to the FinFET technology to bring high-performance, power efficient products to the market. [1]

Increasing Threat From AMD

AMD has historically enjoyed a 15% share in the server processor market but witnessed a continuous slide ever since, mainly on account of execution issues. However, since the launch of its Bulldozer architecture, AMD has seen a steady increase in demand for its high-end server processors. The company now powers 24 of the world’s top 100 supercomputers and is showcasing speed and throughput of its Opteron chips in the world’s third fastest supercomputer – Jaguar. The new line-up of Opteron chips based on the Bulldozer micro-architecture further strengthens AMD’s ability to offer greater choices to a data-starved base of enterprises and growing cloud customers. (Read: AMD’s Server Market To Rebound After A Dismal Q2)

Additionally, AMD is looking to move its CPUs from 32nm to 28nm later this year. We believe that AMD, with a focus on expanding its portfolio, could regain some of its lost market share in the future.

Growth in cloud computing and the rise in dense data centers provide immense opportunities for growth in the server market. Currently, Intel accounts for close to 95% of the server market, but we estimate this to drop down to 78% by the end of our forecast period. However, keeping in mind the growing strength of AMD and the expected entry of ARM-based players, it is possible that Intel’s share will decline by a larger extent. In such a scenario, there would be a slight downside to our price estimate.

However, Intel plans to move to 14nm technology toward the end of 2013 or early 2014, [2] in which case it might be able to fend off competition for a longer time.

We have a price estimate 0f $31.94 for Intel, a premium of close to 20% to the current market price.

See our complete analysis for Intel

Understand How a Company’s Products Impact its Stock Price at Trefis

The hard drive shortage that resulted from flooding in Thailand in October 2011, led to a decrease in demand for chipsets by PC manufacturers in anticipation of shortage in supplies. The impact of the shortage resulted in depressed revenues for Intel and almost all its competitors and is likely to persist till the first half of this year.

However, we feel that due to the supply shortage OEMs (original equipment manufacturers) are likely to give preference to high-end PCs, which might become advantageous to Intel, as it sells lower-priced processors compared to its competitors AMD.

Notes:
  1. ARM, TSMC Deal Aims to Put More Pressure on Intel in Servers, Mobile, eWeek, July 23, 2012 []
  2. Intel beware, ARM and TSMC team-up for 64-bit and FinFET, Hexus.net, July 24, 2012 []