Intel's big fumble gives way to fears that it's 'about to give up its main source of competitive advantage,' as rivals like Arm, Nvidia, and AMD only get stronger (INTC, AMD, NVDA)

Intel's major production delay, which sent its shares plunging more than 16% on Thursday, underscored how its dominance in the chip industry is under threat.
Intel is facing stronger challengers led by AMD, Nvidia and even Arm, the chip design maker which outperformed in the mobile market and has been gaining traction in the server market.
"This was the worst we have seen in our career covering the company, and brings the structural issues we have been talking about for years directly to the forefront," Bernstein analyst Stacy Rasgon told clients in a note.
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Intel's stock plummeted for a second day after the chipmaker said production problems will delay its next generation processors.

The tech giant's stunning announcement underscored the big changes in the semiconductor industry, where Intel's dominance is now seriously threatened by rivals led by AMD, Nvidia and Arm.

Intel's stock plunged more than 15% in Friday trades after the company said a problem in its transition to a more advanced manufacturing process caused the delay.

The news was stunning for a key reason: Intel had dominated the semiconductor industry over the past half century with its superior technology for both designing and manufacturing chips.

Now, the king of the chip industry seemed to be flailing, analysts said.

"This was the worst we have seen in our career covering the company, and brings the structural issues we have been talking about for years directly to the forefront," Bernstein analyst Stacy Rasgon told clients in a note.

The production issues, he added, "overshadow anything good they can put forth, while magnifying any negative events, all while they fight an existential conflict with themselves as they attempt to figure a way out of the hole they have dug."

In fact, the production fumble overshadowed what had been a strong second quarter when Intel actually beat Wall Street's expectations.

But analyst Chris Caso of Raymond Jaymes called the production delay a "bombshell" that suggests Intel is about to "give up what has been its main source of competitive advantage for 50 years."

Intel losing its lead

Intel said the problem was related to its 7 nanometer process, referring to the manufacturing technology based on the line-width on chips.

Historically, Intel led the way in producing smaller and less expensive processors. In fact, it was known to be the master of Moore's Law — the chip industry trend named after Intel co-founder Gordon Moore, in which the number of transistors that companies are able to put on an integrated circuit has roughly doubled every two years. The trend has allowed chip makers to make smaller, more powerful, and less expensive processors.

But then Intel began to lose its lead.

It wrestled with problems in transition to a 10 nanometer process. Rival AMD actually beat it in the transition to the 7 nanometer process.

The Intel fumble is widely expected to give AMD a huge market share boost in PCs and server chips. AMD shares soared nearly 15% on Friday.

With slow growth in the PC market, their rivalry has focused on server chips, especially the cloud giants, led by Amazon, Microsoft and Google, looking to build more data center capacity. AMD has managed to chip away at Intel's dominant position. This was underscored last year when Google announced that it would also use AMD's new server chip Epyc to power its data centers. That meant the AMD chip is now used by the three major cloud platforms.

"Intel is still king, but AMD has been able to address an increasing portion of the overall market with competitive products," analyst Roger Kay of Endpoint Technologies Associates told Business Insider.

Intel's rivals are circling

Intel is facing serious challenges from other players.

Arm, the chip design company owned by Softbank, outpaced Intel in the mobile chip market with a power-efficient architecture that became widely-used in cell phones and other mobile devices.

Last month, Arm scored a big win when Apple announced that it will transition away from Intel chips for its Mac computers. Arm-based server chips have also started challenging Intel's dominant position in the data center market, which covers the massive cloud platforms of Amazon, Microsoft and Google.

Softbank is reportedly considering taking Arm public or selling it, with Nvidia as a potential buyer.

Nvidia, the graphics chips giant, has become another headache for Intel. The rise of AI, particularly so-called Deep Learning, led to a greater need for more powerful chips capable of more heavy-duty computing. Nvidia's graphics processors used for gaming and high-end graphics for blockbuster movies outshined Intel in a rapidly expanding market.

Nvidia has also become a stronger player in the cloud and server market, and earlier this month, surpassed Intel as the biggest US chipmaker by market cap.

'Frankly, none of the numbers matter'

In a call with analysts on Thursday, Intel touted what analysts agreed were robust second-quarter results.

"Obviously this year has been an incredibly challenging year on multiple fronts," he added. But he also said that "competitively, we feel stronger as we exit 2020."

Rasgon of Bernstein said the earnings report was overshadowed by what he considered Intel's longer-term problems.

"Frankly, none of the numbers matter," he wrote. "While Intel suggested they at least know what the problem is, it certainly doesn't sound like a fix is forthcoming anytime soon given the magnitude of the delay."

Got a tip about Intel or another tech company? Contact this reporter via email at bpimentel@businessinsider.com, message him on Twitter @benpimentel or send him a secure message through Signal at (510) 731-8429. You can also contact Business Insider securely via SecureDrop.

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