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THE END OF ONE-CHIP WONDERS: WHY NVIDIA, INTEL AND AMD’S VALUATIONS HAVE
EXPERIENCED MASSIVE UPHEAVAL

Published: April 12, 2022 at 1:56 p.m. ET
By

WALLACE WITKOWSKI

  comments


FIVE YEARS AGO, INTEL WAS WORTH AS MUCH AS NVIDIA AND AMD COMBINED; NOW, NVIDIA
IS WORTH AS MUCH AS THE OTHER TWO AS TAIWAN SEMI ALSO SURGES, REFLECTING A
MASSIVE CHANGE IN THE SEMICONDUCTOR INDUSTRY IN THE PAST DECADE


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It wasn’t too long ago that Intel Corp. was the unquestioned king of U.S. chip
makers and the largest semiconductor company by market capitalization. It’s also
not long since most computing was done with a PC.

Since then, a host of changes have occurred in how people interact with
technology, and other companies have specialized in taking advantage of those
changes, causing Intel INTC, -0.15% to fall behind. While the company was worth
as much as rivals Advanced Micro Devices Inc. AMD, -2.33% and Nvidia Corp. NVDA,
-1.88% combined five years ago, Nvidia is now worth as much as the other two
combined, a massive sea change in semiconductor valuations that mirrors the
change in the industry itself.

For instance, Qualcomm Inc. QCOM, +0.54% rose to prominence with the rise of
cellphones and then later with Blackberries, Apple Inc.’s AAPL, +1.15% iPhones,
and mobile devices in general. AMD took Intel head-on in the mid-2000s and
gained a quarter of the market for central processing units, or CPUs — Intel’s
bread and butter — only to retreat and then make a similar move in servers in
recent years. Nvidia’s graphics-processing units, or GPUs, once known for just
making videogames prettier, have taken to powering cloud-computing data centers
after their utility in machine learning was discovered. Taiwan Semiconductor
Manufacturing Co. TSM, -0.13%, or TSMC, grew to become the largest cutting-edge
foundry for chip makers whose architectures surpassed Intel’s over the past few
years.


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Of the 30 companies tracked by the PHLX Semiconductor Index SOX, -0.25%, Intel
enjoyed the largest market capitalization for decades, but in the past few years
that lead has disappeared; it is now the fifth largest, with other companies
vying to push it farther down the list. Intel has learned the hard way that with
all these competitors in an evolving landscape, it too needs to evolve, a plan
that new Chief Executive Pat Gelsinger seems to be undertaking.



HOW NVIDIA BLEW PAST INTEL

One way to see how the chip industry reached this point is to look at the
current heavyweight, the most valuable semiconductor company on the SOX index —
Nvidia, with a market cap of about $580 billion. Nvidia has succeeded in two
related areas of the fastest-growing chip segment: the data center, where the
growth of cloud-computing services from the likes of Amazon.com Inc. AMZN,
-0.22%, Microsoft Corp. MSFT, -1.12%, and Alphabet Inc.’s Google GOOGL, -0.86%
GOOG, -1.10% have required ever more performance using less electricity, and
artificial-intelligence capabilities.

First, Nvidia showed that GPUs could help to increase the ability of data
centers, which have long been run with CPUs. While CPUs work quickly through
tasks that require user or system interaction, GPUs can break complex problems
into millions of separate tasks to work them out at once, in so-called parallel
processing.



Then, Nvidia tried to corner the market on Arm-based processors with its $40
billion bid to acquire Arm Holdings Ltd., which eventually was withdrawn amid
regulatory pressure. Arm uses an architecture that is different from the
once-standard x86 one built by Intel in the early days of computing. While not
being able to run Arm outright, Nvidia has a 20-year license with the company.

Don’t miss: Chips may be sold out for 2022 thanks to shortage, but investors are
worried about the end of the party

“One of the things I think that a lot of people don’t appreciate when they get
down on Intel is the breadth of products that Intel has to build to be
successful: It’s huge,” Maribel Lopez, principal analyst at Lopez Research told
MarketWatch. “For example, no one’s looking at Qualcomm saying they expect them
to unseat Nvidia GPUs in the data center.”

“Meanwhile, you got someone like Nvidia saying ‘I got to build some CPUs to go
with my GPUs in the data center’,” Lopez said. “It’s the whole recognition that
if you want to compete in the larger landscape, you have got to make
acquisitions.”



Then, there’s another area where Intel has a long way to go to catch up to
Nvidia: Software. Nvidia over the years has developed an entrenched software
ecosystem in which to run their chips, prompting some analysts to compare it
with software companies.


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Analysts say Nvidia is far ahead of Intel and others in software, but Intel is
trying to catch up. Intel recently announced it was acquiring Israel-based
Granulate Cloud Solutions Ltd. for an undisclosed sum, although TechCrunch
reported the deal was worth around $650 million, citing “well-placed,”
unidentified sources. Granulate develops cloud-optimization software that helps
boost performance in existing hardware.

That tracks with Intel’s rationale behind the shedding of its nanometer-based
naming convention back in July, as executives wanted to begin taking into
account a chip’s “performance per watt” as a measure rather than just how many
transistors it could fit in a given space.

And it’s not just Intel. Recently, both AMD and Qualcomm announced moves that
will broaden their reach into software. AMD said it was acquiring the widely
used data-center services platform Pensando for nearly $2 billion, coincidently
just shy of the $2.24 billion the company’s enterprise, embedded and semi-custom
chips business (i.e. data-center and gaming console unit) took in during the
holiday quarter.

Read also: The pandemic PC boom is over, but its legacy will live on

Qualcomm, on the other hand, said it closed on its deal to acquire a full stake
in Arriver, the driving-automation software company it helped build with Veoneer
Inc., from SSW Partners following a joint acquisition where Qualcomm and SSW
Partners bought Veoneer for $4.5 billion. Qualcomm plans to use Arriver to build
out a fully-automated driving stack for its Snapdragon Ride platform.


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Chip maker Broadcom Ltd. AVGO, +0.77% was comparatively early in broadening its
software holdings through acquisitions like Symantec’s enterprise security
business, CA Inc. back in 2018, and Brocade Communications Systems Inc. for $5.5
billion in late 2017. Those acquisitions once left analysts puzzled, but as of
the last reported quarter, Broadcom derived about one quarter of its $7.71
billion in quarterly revenue from software sales.

Currently, the company seeking to dethrone Intel from the No. 5 position is AMD,
which passed Intel in market cap at times in recent weeks, a dynamic few who
tracked the industry a decade ago would have believed at the time. For years,
AMD has lived in the shadow of Intel, referred to as the “smaller” rival in the
data-center and PC chip market with respect to market capitalization, but that’s
no longer the case as the two companies jockey for position.

The gap between the companies narrowed considerably after AMD closed its $35
billion stock deal to acquire chip maker Xilinx Inc., which sent AMD’s valuation
higher than Intel’s for the first time. The boost in AMD’s share count gave the
company a market cap of $197.63 billion at the close of market Feb. 15, when
shares finished at $121.47, compared with Intel’s close at $48.44 for a market
cap of $197.25 billion, a difference of about $380 million.

Since then, the lead has flipped back and forth several times, with AMD gaining
its widest lead so far at about $6.2 billion on Feb. 28. With a recent decline
in AMD’s share price, though, Intel leads by about $34 billion now.



ONE FAB TO RULE THEM ALL

While chip makers seek to diversify to compete, there’s one factor in the
background where a virtual monopoly exists, and that’s in where the silicon
transistors are made. No matter how diversified an individual chip maker is,
that diversification matters little if you don’t have the manufacturing capacity
for the silicon, and that makes the industry beholden to TSMC, Raymond James
analyst Chris Caso told MarketWatch.


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“There is virtually no piece of electronics that doesn’t have substantial
content from TSMC and comes out of Taiwan,” Caso said. “TSMC touches
everything.”

TSMC owns fabrication facilities, or fabs, where the actual silicon wafers are
made, for chip makers. Fabs are a huge capital investment, often taking two to
three years to build because of their complexity.

TSMC first surpassed Intel in market cap in March 2017, then spent the next
three years jockeying back and forth before stepping on the gas in June 2020,
nearly two months before Intel announced that its next generation of chips would
be delayed. Right before that, Nvidia started jockeying with Intel and similarly
pulled away following the delay announcement.

Even though Samsung Electronics Co. 005930, +2.54% and GlobalFoundries Inc. GFS,
-1.39% also offer third-party foundry services, Samsung, while it has
leading-edge capacity, is smaller in the foundry space than TSMC and is “more
selective with what they do,” and GlobalFoundries caters to those chip makers
who produce lagging-edge — but still necessary — technology, Caso said.

For more: Semiconductor sales top half a trillion dollars for the first time,
and are expected to keep growing

Even Intel, which prides itself on having its own foundries and is seeking to
move into TSMC’s market by offering third-party fab services, relies on TSMC for
some of its cutting-edge products that require a greater transistor density.
That reliance was laid bare when the company, in its July 2020 delay
announcement, said a “defect mode” in its manufacturing process was the root
cause for the delay, and that its contingency plan would be using “somebody
else’s foundry,” widely considered to be TSMC.

“It’s more of an industrywide problem, which is if something happens to TSMC’s
ability to produce inside of Taiwan, then pretty much the whole semiconductor
industry, and the whole electronics industry, and frankly, the whole world
economy have some big issues,” Caso said.

“I think the notion of being a fab for lots of people has been very successful,”
Lopez said of TSMC. “This is one of the reasons you see the shift in Intel’s
strategy. It keeps you at full capacity all the time as a fab.”

For a sense of scale, Nvidia and TSMC combined currently have come to account
for more than a third — $1.1 trillion — of the $3 trillion market cap of the 30
companies that make up the PHLX Semiconductor Index. By comparison, the combined
caps of Intel and AMD make up about 12% of the index.


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ABOUT THE AUTHOR

Wallace Witkowski


Wallace Witkowski came to MarketWatch from the Associated Press in New York,
where he was a business reporter specializing in pharmaceutical companies. He
previously reported for trade publications in covering the drug and
medical-device industries back to 1998. Based in San Francisco, his focus is on
U.S. equities. Follow Wally on Twitter at: @wmwitkowski.

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