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Morningstar | Intel's Data-Centric Innovation Summit Underscores Promising Prospects in Cloud and AI

Intel held its Data-Centric Innovation Summit on Aug. 8, during which management highlighted the chip titan’s numerous efforts in the data center. The presentations validated our confidence in our investment thesis for wide-moat Intel, as the shares continue to trade at an attractive discount to our unchanged $65 fair value estimate.

One of the key takeaways, in our view, was that 50% of the Xeon server processors sold to the 10 major cloud service providers in 2017 were custom-designed for the individual customer, up from 18% in 2013. We think Intel’s increasingly deeper and more intimate relationship with cloud service providers to help them optimize workloads will make it difficult for competitors such as Advanced Micro Devices to capture meaningful server CPU share, at least in the growing cloud environment. On the artificial intelligence front, Intel captured $1 billion in AI-related Xeon data center revenue in 2017, as we note the flexibility of its Xeon products to effectively run both AI and non-AI workloads is highly appealing to major cloud service providers. Consequently, we maintain our view that Intel will be a formidable force in both the data center and AI semiconductor markets for the foreseeable future, despite recent market enthusiasm for Nvidia, Xilinx, and AMD traction.

Another important facet of Intel’s data center strategy is its rising focus on a platform approach versus a singular component offering (Xeon CPU). Whether it be other types of silicon (FPGAs or ASICs), memory (Optane persistent memory or solid-state drives), or other networking adjacencies, Intel is building its presence at cloud service providers beyond the CPU while assisting enterprises and the second wave of cloud adopters with modernizing their infrastructure and transitioning to new technologies. For example, Intel initially began its optimization work with Google in 2008. More recently, Intel’s 2017 Skylake Xeon CPUs were shipped early to various cloud service providers, with Google being the first customer to deploy these chips in its cloud. We note Intel recently received an infrastructure partner of the year award from Google and will also be shipping its 2018 Cascade Lake server chips with Optane persistent memory (for superior AI workload performance) to Google before the official launch. The firm’s product roadmap (14-nanometer Cooper Lake in 2019 and 10-nanometer Ice Lake chips in 2020) was also confirmed during the presentations, and we foresee Intel offering these chips to major cloud service providers before the general public.

We reiterate our view that Intel’s consistent performance increases coupled with optimized solutions for major cloud service providers will fortify its ability to fend off competitive advances, while the process technology is not the only factor that needs to be contemplated when assessing the merits of competing server offerings.