What Does Intel And AMD’s Latest Deal Mean?
In an interesting development, Intel (NASDAQ:INTC) and AMD (NYSE:AMD) have announced a partnership to build a new chip which will combine Intel’s CPU with AMD’s Radeon GPU technology. The move is aimed at combating rival Nvidia (NASDAQ:NVDA), which is becoming increasingly competitive. The new chip will be geared towards high-end gaming notebooks, and will allow OEMs to develop lighter and thinner notebooks without losing the massive processing power that high-end gaming requires. With this move, Intel aims to solve what it calls the ‘portability obstacle’, which refers to the heavy and bulky form factor of gaming notebooks. Overall, for Intel, this appears to be a defensive move aimed at offsetting weak PC sales. However, for AMD, this appears to be an aggressive move against Nvidia, which has taken discrete GPU market share from AMD over the last few years.
Our price estimate for Intel stands at $41, implying a slight discount to the market.
For AMD, An Aggressive Move
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AMD has been losing share in the discrete notebook GPU market. With this partnership with Intel, the company appears to be looking to regain that lost ground. A 10% gain in market share would imply roughly $300 million in additional revenue for AMD. The significance of this incremental growth would be even more visible in the bottom line. AMD has struggled to remain profitable in recent years, and market share gains could lead to meaningful margin improvement.
This partnership will likely have minimal cannibalization impact for AMD. We note that AMD’s share of CPUs in gaming laptops in particular is extremely low, and it competes in this area primarily on the GPU front.
For Intel, A Defensive Move
Global annual PC sales have declined from 350 million in 2012 to 260 million in 2016. We expect the figure to go down further to around 250 million this year. Considering that Intel has a massive 80% share of this market, it stands to lose the most from this decline. So with this new innovative chip, the company is hoping that it will be able to attract more customers into upgrading their PCs/notebooks or simply gain more first time buyers. Assuming a $150 average price per Intel processor, a 1 million incremental increase in global PC sales would translate into additional revenue of $120 million for Intel. That’s roughly 0.2% of its current revenue. However, there would be an additional benefit from sales of chipsets. Currently we forecast PC sales to decline slightly going forward. However, if Intel and AMD’s joint efforts eventually push global PC sales past 300 million, it could lead to a potential 10% jump in Intel’s revenue.
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