Intel hasn't felt this buoyant in a long time.
The chip behemoth outpaced analyst predictions with its Q2 report, dispelling the gloom of the previous two quarters. Intel's quarterly earnings reflected revenues of $12.9 billion and a net profit of $500 million, surpassing analysts' expectations who had forecasted a loss of 4 cents per share for Q2. Intel's performance was better than anticipated, with earnings of 13 cents per share.
This remarkable Q2 report has helped Intel regain favor with investors. On July 28, Intel's opening stock price rose over 6%.
Intel was the first chip giant to release its Q2 financial results this year. Earlier this week, both Microsoft and Alphabet, Google's parent company, released their quarterly reports, with artificial intelligence (AI) being the focal point of investor interest. Investors were also eager to decipher from Intel's report the potential impact of AI on this chip giant's future.
AI chips have become a battleground among the chip giants, yet NVIDIA currently dominates. Microsoft and Alphabet both stated plans to increase spending on data centers, which is expected to benefit NVIDIA the most.
Once the undisputed leader in the server chip market, Intel is hoping to ride the AI wave to reclaim its crown. Intel CEO Pat Gelsinger stressed that the company is completely committed to exploring AI opportunities. As AI permeates everything, it presents a broad array of opportunities.
Looking at the specific numbers, there are signs that Intel's Q2 performance has hit bottom.
Recovery in the personal computer market has resulted in a reduced decline in the revenue of Intel's Client Computing Group. From a year-on-year decline of 30% in the previous two quarters, the decline was 12% in Q2, reaching $6.8 billion. Revenue from the Data Center and AI Group declined 15% year-on-year, standing at $4 billion. Although there was a decline in some other businesses, including autonomous driving company Mobileye, the biggest highlight was a year-on-year increase in foundry service revenue of 307%, reaching $232 million.
Intel CFO David Zinsner stated that the stronger-than-expected Q2 performance was due to both operational efforts and progress in cost reduction. Intel had announced a plan to save expenditure with a goal of reducing capital expenditures by $10 billion by 2025.
Many analysts believe that the revival of Intel's performance was mainly due to robust PC sales. PC sales have rebounded from near-historic lows in Q1. Market research firm Canalys's data shows that the oversupply in the PC market has eased and the market is expected to accelerate recovery in the second half of the year. However, shipments for the full year will still be lower than in 2022.
This suggests that the key focus for Intel's future growth is its data center and AI business. Considering the current performance, Matt Bryson, an analyst at Wedbush Securities, believes that Intel needs to improve its server performance and the pace of business expansion in new opportunities like AI.
Gelsinger believes that large cloud service customers are currently investing a lot of energy and budget in building high-end AI training environments. This has led to a short-term surge in demand, and he expects the supply-demand relationship to balance over time.
Intel hopes that AI capabilities will not be limited to cloud services, and plans to integrate AI into every product they manufacture.
During a conference call, Gelsinger emphasized that AI opportunities will not only be in the cloud, but will also have broader applications. "AI will appear in every hearing aid, including mine," said Gelsinger, indicating that AI will have a wide range of applications on the edge and at the client level, which will be an opportunity for Intel in the future.
Gelsinger noted that Intel will seize the significant growth opportunities of end-to-end AI through advocating for an open ecosystem, offering chip solutions to optimize performance, cost, and security, and promoting AI popularization from cloud to enterprise, edge, and client.
In mid-July, Intel had already released the AI processor Gaudi 2, specially made for the Chinese market, aimed to rival NVIDIA's high-end GPUs A100 and H100. Intel also plans to release its first consumer chip with a built-in neural network vision processing unit (VPU), Meteor Lake, which can run AI models, later this year.
Intel's Executive Vice President and General Manager of the Data Center and AI Business Group, Sandra Rivera, had also revealed to Wall Street that by 2025, Intel plans to merge the Gaudi and GPU routes to release more integrated GPU products.
Gelsinger anticipates that data center chip sales will slightly decrease in the third quarter and recover in the fourth. However, the sale of AI chips is booming. He revealed that Intel's customer orders have already reached 2024, enabling at least $1 billion worth of AI chip sales.
Indeed, NVIDIA's market capitalization has surpassed $1 trillion, with its stock price skyrocketing over 2x from $140 per share to a peak of $480 within the year. This was due to its providing the perfect "shovels" for the AI gold rush, offering chips and ample computational power to large cloud service providers.
Intel also hopes to be a shovel-seller in the AI era, not just in the cloud, but everywhere.
There were already indications of this. Microsoft's AI writing assistant, Copilot, is based on cloud service technology. But at the beginning of the year, Panos Panay, Microsoft's Chief Product Officer, emphasized at an AMD release event that "AI will reshape the way we use Windows devices." At this event, AMD launched a chip equipped with an AI engine.
Gelsinger also expressed that Meteor Lake is pushing PCs toward artificial intelligence, and AI will drive the workloads of entire applications.
This means Intel needs to reshape the existing ecosystem with partners like Microsoft using AI, breaking NVIDIA's monopoly. This could be key for Intel to catch up with rivals like NVIDIA and AMD and return to its glory days in the PC era by riding the AI wave.
Bill Gates once called Intel the "King of Chips". This titan has led the chip industry for decades, created Moore's Law, and was a key player in the third industrial revolution. Now, in the "fourth industrial revolution" led by AI, Intel wants to find its path and continue to lead this era.
