The ongoing decline in PC sales around the world has put two big companies under pressure – Microsoft (MSFT, Financial) and Intel (INTC, Financial). Microsoft has made it clear that the direction it wants to take is a device-agnostic one that blurs the lines between desktops and mobile devices, but Intel has been a lot slower to react to the decline.
Intel’s Client Computing Group (CCG), which is dependent on PC sales, accounted for more than half its total sales during the third quarter while its growing parts – Data Center Group (DCG) and Internet of Things Group (IoTG) –Â accounted for a combined volume of 33.15%.
PC sales aren’t going to decline indefinitely, of course, because of demand in the enterprise and consumer markets, but it will not be able to sustain substantial growth for Intel. That means the chip-maker is increasingly going to be dependent on growth in DCG and IoTG to show top line growth.
IoTG brought in $689 million in revenues out of the $15.778 billion the company made during the third quarter. Internet of Things may be growing worldwide, but it is still in its early stages of adoption as various industries figure out how to maximize the advantages that IoT can offer. Because of this, it will be many more years before IoT provides enough numbers on its own to help Intel’s top line grow.
As a result, DCG is the only segment that Intel has to provide the growth momentum it needs to offset any declines in CCG revenue growth. The growth of the cloud industry, which has been growing at strong double-digit rates for the past several quarters, as well the ever-increasing usage of deep learning, are the two important factors that are already driving this segment’s growth and will continue to do so for the next several years.
Case in point: NVIDIA’s (NVDA, Financial) data center revenues nearly tripled during the recent quarter, and the company expects the momentum to continue for the next several quarters. That’s a tide that Intel can definitely ride because, even though NVIDIA holds sway over the hyperscale computing market, the growth is still solid enough to support multiple players. Intel has shown this in the past couple of quarters, and it now has the opportunity to continue trending in DCG.
Intel has been relatively late to the AI game, but it bought Nervana in August this year for $400 million.
“Nervana’s approach has some direct appeal to a chipmaker like Intel in that the company has been working to bring machine learning all the way into the silicon, rather than simply making software that can run on top of anyone’s cluster of graphics chips,” wrote Recode.
In the data center segment Intel’s chips are already in a dominant position in the enterprise server and cloud server markets; if the company can add potent chips for hyperscale computing and for deployments in machine learning systems, it will make its offering a complete one for its enterprise level user base.
NVIDIA, as mentioned, has firmly entrenched itself in the hyperscale computing market, which has allowed it to keep posting strong growth numbers in the last three quarters, but the acquisition of Nervana can provide a huge boost for Intel’s efforts in the AI market currently dominated by NVIDIA’s GPU products.
“The technology innovations from Nervana will be optimized specifically for neural networks to deliver the highest performance for deep learning, as well as unprecedented compute density with high-bandwidth interconnect for seamless model parallelism,” Intel CEO Brian Krzanich wrote in a recent blog post. “We expect Nervana’s technologies to produce a breakthrough 100-fold increase in performance in the next three years to train complex neural networks, enabling data scientists to solve their biggest AI challenges faster.”
Intel has the tools now to compete in the fast-growing data center market with significant thrust from the AI segment. But the company will face stiff competition from the current leader NVIDIA, whose GPUs are used by almost all the big tech companies. Intel’s execution has been a bit of a hit and miss in the past, but the company cannot afford to let go of this opportunity. It is the best bet on the horizon right now.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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