AMD is losing ground to Intel in this key chip market | Colorful fool

Advanced Micro Devices (AMD 1.03%) and Nvidia (NVDA -0.87%) hold a near duopoly in discrete GPUs. Nvidia dominates most of the market with its high-end chips, while AMD remains a persistent underdog in the low-end market. However, this duopoly could soon be threatened Intel (INTC 0.46%), which recently returned to the discrete GPU market after more than two decades. According to JPR, Intel captured 4% of the discrete GPU market in the third quarter of 2022, compared to roughly 0% a year earlier. AMD’s share dropped from 17% to 8%, while Nvidia’s increased from 83% to 88%.

It wasn’t surprising that AMD ceded some of its market share to Nvidia, but its losses to Intel are concerning because Intel is targeting many of the same low-end PC players as AMD. Let’s take a look at why Intel is expanding into discrete GPUs again and how this expansion could limit AMD’s long-term growth.

Why does Intel sell discrete GPUs?

Intel is still the largest GPU maker in the world, thanks to integrated GPUs that are baked directly into its CPUs, but those chips can’t handle graphically advanced games and applications. This is where powerful discrete GPUs come in, which are installed separately as add-on boards.

Two decades ago, the discrete GPU market was dominated by Nvidia and ATI, which was bought by AMD in 2006. Intel tried to enter the market with the i740 GPU in 1998, but it flopped and was discontinued after a few months. In 2009, he tried to return to the market with a new discrete GPU, but this project was eventually canceled.

The lack of a powerful GPU is a sore spot for Intel, as AMD now combines its CPUs and discrete GPUs in APUs (advanced processing units) for PCs, SonyPS5 and Microsoftthe Xbox Series S and X consoles. Intel even licensed Nvidia’s GPU technology for its own integrated graphics chips until that contract expired in early 2017.

That’s why Intel finally launched a new generation of Xe discrete GPUs in late 2020 and early 2021. The first batch included its Iris Xe MAX chips for mid-range notebooks as well as additional Xe GPUs for desktops and servers. These chips pave the way for more powerful Arc GPUs to challenge AMD’s Radeons and Nvidia’s GeForces in the high-end PC gaming market in early 2022. Like AMD and Nvidia, Intel is outsourcing the production of these 7nm GPUs Taiwanese semiconductor manufacturing.

Several recent industry tests show that the Intel Arc A380 provides much better performance than the AMD Radeon RX 6400 in a wide range of games. This is a clear red flag for AMD in the low-end market, as the RX 6400 costs about $10 more than the A380, which retails for around $140. A comparable GTX 1630 from Nvidia costs about $200.

How could Intel hurt AMD in the GPU market?

Intel’s market share gains wouldn’t be too worrisome if the overall GPU market continued to expand. However, according to JPR, shipments of discrete GPUs fell 42% year-on-year to 14 million units in the third quarter of 2022 as the PC market shrank. Therefore, Intel, AMD and Nvidia are fighting for a shrinking market.

Intel’s return to discrete GPUs also coincides with a cyclical slowdown for AMD. AMD’s revenue rose 45% in 2020 and rose another 68% in 2021 as people bought new computers to work remotely, take online courses and play more PC games. Analysts expect its revenue to grow another 43% this year, thanks in part to its acquisition of Xilinx in February, but growth will slow to just 6% in 2023 as that purchase expires, and it faces a slowdown now that pandemic concerns have eased.

Starting in the second quarter of 2022, AMD began reporting its gaming revenue separately from its CPUs and other embedded chips. Its gaming revenue grew 32% year-over-year in the second quarter, but only grew 14% year-over-year (and remained roughly flat sequentially) to $1.6 billion in the third quarter. During both quarters, AMD said its robust sales of its semi-custom APUs for gaming consoles offset its declining sales of PC gaming GPUs.

AMD expects this slowdown, which is also weighing on its CPU business, to continue for the foreseeable future. Intel Xe and Arc GPUs could therefore cause even more headaches for AMD’s gaming business as the PC market expands.

But AMD’s pain is not Intel’s gain

Intel appears to have struck a surprise blow against AMD in the GPU market, but the victory doesn’t address its main problems of slow CPU sales and its inability to produce smaller, more energy-efficient CPUs than AMD, which also outsources its CPU production. CPU to TSMC.

Instead, it only highlights Intel’s hidden dependence on TSMC, its main foundry competitor, and reveals that it cannot yet produce high-end discrete GPUs through its own foundries. AMD may face some fresh headwinds from Intel’s discrete GPUs, but investors shouldn’t expect those headwinds to generate significant tailwinds for Intel.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Microsoft, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January $57.50 calls on Intel, long January $45 Intel and short January $45 Intel. The Motley Fool has a disclosure policy.