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Intel Shouldn't Worry Too Much About Apple's Chip Ambitions

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Industry experts and analysts have talked for some time now about Apple contemplating manufacturing its own chips. Recently, an article in Nikkei Asian Review touched on this topic, citing acquisitions made by Apple in recent years and how it may be looking to reduce its reliance on Intel and Qualcomm going forward. Apple is minting money with its iPhone, which gets its chips from Qualcomm. Meanwhile, Apple’s deal with Intel is primarily related to microprocessors and chipsets for the Mac business, which include both desktops and notebooks. What happens if Apple eventually looks to cut Intel out? Given Intel’s limited exposure to Apple, we believe that the company shouldn’t worry too much about this possibility. Instead, it should focus completely on growing in the mobile, data center and artificial intelligence markets.

Apple sells roughly 20 million PCs annually. With an estimated average PC processor price of nearly $160 for Intel, the relationship with Apple accounts for roughly $3.2 billion in revenue. This figure amounts to about 5% of Intel’s total revenue, which suggests that the risk exposure is not particularly high. In addition, we expect that 5% figure to shrink over time because of stagnation in the PC market and the growth expected in other segments in which Intel operates. It should be noted that we do not believe that Apple cutting off Intel is a near term possibility, and if were to happen, it would likely take several years.

Accordingly, Intel should worry more about how to maintain its dominance in the data center market and how to compete with Nvidia’s GPUs which are gaining ground in machine learning applications. To Intel’s credit, it has recognized the need to invest to capture the growing AI market. It closed the acquisition of Mobileye, an Israel-based autonomous vehicle technology company, in the third quarter of this year. But considering that Mobileye had revenues of less than $400 million in 2016, a price tag of $15 billion looks fairly steep. But on the bright side, Intel estimates a $70 billion market opportunity for autonomous driving systems, data and services – which is where Mobileye focuses.

Intel registered nearly 9% growth in its data centers segment in the second quarter of 2017. This was driven by cloud and communication service providers, which more than offset the decline in the enterprise business. However, it all boils down to Intel’s new Xeon scalable platform for the data center market, which the company touts as the biggest improvement in a decade. There will always be a set of clients who will be loyal to Intel and value high computing performance over anything. However, the risk for Intel lies with the rest of the client base, who could start to see that the yield of computing power per dollar spent has started to look impressive for AMD server processors and Nvidia’s GPUs, which are finding strong acceptance in the cloud and AI markets.

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