Weekly Reads - October 23, 2023
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NVIDIA’s entrance into the CPU market may break up the longstanding duopoly of Intel and AMD creating a new era of competition that could severely weaken the long-term earnings power of incumbents.
Known for their AI chips, NVIDIA is taking the plunge into the central processing unit (CPU) market by working on CPUs that will be able to run Microsoft’s Windows using technology from ARM. Microsoft is trying to transition its chips to ARM architecture after rival Apple has doubled its market share in the last three years after the release of their ARM-based chips for their Mac computers. By working with successful chip designer NVIDIA Microsoft is looking to expedite this process, hoping to make the transition as quickly as possible to avoid further market share losses. This news had an adverse effect on CPU incumbent's stock prices with the market viewing NVIDIA as a true threat to take CPU market. We expect Intel to be the biggest loser with AMD already planning to make chips for PCs with ARM technology versus Intel which has stuck with their x86 architecture which is slowly becoming less relevant. While the x86 architecture is considered to be generally faster for most computing tasks than ARM; ARM architecture consumes far less energy, is more heat efficient, and delivers faster computer speeds for certain tasks. The biggest advantage for NVIDIA could be combining the efficiency of ARM architecture with AI features into their CPUs further differentiating the product from Intel or AMD which have been slower in the AI front. The biggest winners in all this are likely Microsoft and ARM. Microsoft continues to diversify away from Intel by working with multiple chip designers therefore reducing their dependence on one supplier while increasing the competitiveness of their hardware through the use of AI-enabled CPUs. The fear of NVIDIA gaining share in CPU is likely to push the use of ARM in more CPU chips in laptops and computers which is a growth market for ARM who has historically been used in mobile devices. This increased competition will likely have an adverse impact on the CPU competitive landscape as incumbents may be forced to invest more capital in catching up with NVIDIA in AI and working to differentiate their product to retain market share.
Geopolitical tensions between the U.S. and China have resulted in the Chinese government pushing the adoption of domestically produced semiconductor equipment for Chinese foundries with recent results concerning for incumbents.
Domestic Chinese semiconductor equipment manufacturers are winning market share in China with total domestic revenues up 39% YTD reaching a record $2.2B in revenue. With U.S. tightening restrictions on China’s semiconductor industry there has been a push for Chinese foundries to adopt domestically produced semiconductor equipment over equipment leaders such as Applied Materials, KLA, and Lam Research. Recent results indicated that domestic producers such as Naura and AMEC are winning share with these domestic players winning 62% of bids from July to August 2023 compared to just 36% from March to April. In reaction to U.S. restrictions, the Chinese government has pushed foundries to buy domestically produced equipment with some foundries reportingly looking at every foreign-produced piece of equipment and seeing if they can find a domestic alternative to replace them with. The most worrying aspect of this news has been the improvement of Chinese equipment which historically has paled in comparison to foreign equipment. It has been reported that some AMEC machines that have entered production have produced chips as advanced as 5nanometer which is shocking since market analysts believed AMEC was two years behind incumbents in producing this type of equipment. While AMEC and Naura are still far away from producing the full line of equipment needed to serve a foundry it is incredible how quickly they have caught up. The impact of this trend remains relatively small for incumbents which have 25%-30% revenue exposure to China but generate most Chinese revenue from foreign-based foundries operating in the country. These foreign foundries are unlikely to use Chinese equipment due to restrictions enacted by their home countries, but in a future in which tensions ease and restrictions are slowly pulled, there could be the case that foundries look at Chinese alternatives either to reduce costs or quickly increase capacity within China.