Intel’s Xeon Chips Are Impressive, But Investors Shouldn’t Celebrate Just Yet

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Earlier this week, Intel (NASDAQ:INTC) unveiled its new Xeon processors targeted at data centers, touting its Xeon scalable platform as the biggest platform advancement in a decade. On the face of it, the improvement in performance that Intel demonstrated over its previous versions was very impressive. The market reacted positively, but the stock’s movement suggests that the positive sentiment is not overly strong. This is echoed in analyst opinions as well, which appear to be divided. While several analysts who attended the product launch event were happy with Intel’s efforts and expected the company to sustain its dominance in the near term, there were also a few who expressed reservations.

So how should investors view these developments? Our unique interactive platform allows you run quick scenarios and gauge the impact on Intel’s earnings and valuation. The image below shows a “bear case” scenario where Intel loses nearly half of its share in the server market in the next five years. Such a scenario would imply nearly a 20% downside to our current $37 price estimate for Intel, which is slightly ahead of the current market price.

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See our complete analysis for Intel

While many players have tried to challenge Intel’s dominance in the space, the company has managed to retain its market share of over 90%. However, this may change soon. The market for server chips has never been more competitive than it is today. With AMD, Qualcomm and Nvidia targeting the data center market, Intel will have a hard time maintaining its share. Some of the comparisons that Intel made in its recent product launch did not fully address the section of the market that competitors like AMD are targeting. Even if Intel does keep its leadership in the high performance segment, it still has some downside related to competitive pressure. Some channel checks suggest that Intel may face some competition from AMD’s new EPYC architecture chip. In addition, one of the most significant threats could come from Nvidia, whose GPUs are adept at parallel processing required by many data centers, especially those powering AI and big data analytics. Overall, Intel is very likely to see some pressure on its server market dominance going forward.

Nevertheless, investors can take solace from the fact that unlike the consumer market, the server market is relatively slow to change. Semiconductor research firm Mercury Research notes that product changes tend to show up in market share data after a lag of 18 to 24 months.

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