Intel: HPC And AI Are New Catalysts – Seeking Alpha

Intel (NASDAQ:INTC) is not just a chipmaker anymore. Rather, it is fast becoming one of the world's most sophisticated companies that deal with modern computing technologies. With a new era of computing unfolding rapidly, Intel is changing itself to lead the industry from the front. HPC (high-performance computing) and AI (artificial intelligence) are the future of computing, and Intel is a pioneer in these areas. However, the stock price doesn't reflect this. Instead, it continues to languish in a range.

Investment Thesis

I strongly believe the investing community should look at Intel stock from a new perspective. However, that doesn't mean I am suggesting to ignore the fundamentals like revenue and earnings growth. Fundamentals will certainly catch up, albeit not immediately. Intel recently demonstrated how it is preparing itself to stand up against its chief competitor Nvidia (NASDAQ:NVDA) amid the changed industry dynamics. Let's delve deeper into the subject.

Intel vs. Nvidia

Intel is facing the toughest competition from Nvidia, a company that revolutionized the world of HPC and AI by continuing to improve a single product called GPU. Recently, the company launched Volta, "the world's most powerful GPU computing architecture, created to drive the next wave of advancement in artificial intelligence and high performance computing," according to the company.

The basic difference between the approaches of Intel and Nvidia is that while the former seeks to thrive based on a range of products, the latter is betting on just one product. This could be Nvidia's only weakness in the stock market as of now. However, the company is making an ecosystem around its GPUs with its proprietary CUDA parallel computing platform so perfectly that it would be impossible for Intel to beat Nvidia in the near term, say twelve to eighteen months, even with its array of products. In the long run, though, I expect Intel to emerge as the winner.

The of role HPC in future in terms of applications will not be what it was in the last twenty years, i.e., complex scientific research and analysis, and national missions of governments around the world. New areas like smart economics, autonomous driving, smart factories driven by IoT (Internet of Things) and, of course, predictive analytics will benefit from HPC and AI.

According to a report:

The High Performance Computing (HPC) market is estimated to grow from USD 28.08 Billion in 2015 and projected to be of USD 36.62 Billion by 2020, at a high Compound Annual Growth Rate (CAGR) of 5.45% during the forecast period. The HPC market is growing as it interests all kinds of businesses with most common end users of these systems being researchers, scientists, engineers, educational institutes, government and military and others who rely of HPC for complex applications. However, HPC is not only limited to these verticals or departments, but is also seen gaining tractions among the enterprises.

So what's the challenge Intel is facing from Nvidia?

Now let's evaluate how Intel is addressing the issues.

#1. Outpacing Nvidia's parallel processing platform by the introduction of FPGAs (field-programmable gate arrays) won't happen overnight. It will take time. Meanwhile, Intel is making sure to outpace GPUs via FPGAs, and the associated software platform for developers. One of the competitive advantages of FPGAs over GPUs is that since FPGAs can support more internal memory bandwidth, analyzing data and then inferring decisions post analysis can be done very quickly with minimal latency. For putting AI in real-world applications, this is absolutely necessary.

According to Bill Jenkins, senior AI product specialist with Intel's Programmable Systems Group:

We're different. When you write software, it's for a fixed architecture. In doing so, you write code in a certain way and people get good at optimizing code for a given architecture.

With FPGAs, you create an architecture for the problem; you control the data path. Rather than having data move through a CPU, then offloaded to memory, it can come right into the FPGA from wherever. It's then processed inline with the lowest latency and in a deterministic fashion.

#2. In an HPC environment, parallel processing needs to be efficiently supported by sequential processing with the help of highly advanced CPUs. While parallel processing can efficiently do the job of imparting training to machines via neural networks, sequential processing is the best option for making decisions when the trained machines, say an autonomous car, apply the training into the decision making process. However, since AI can be, and will be, put to use in a variety of areas, as mentioned above, from small-scale factories to large-scale banking and financial networks, the CPUs should be highly scalable.

Intel's upcoming Xeon Scalable processors will be able to address this issue. These processors, coupled with Intel AVX-512 software platform (AVX is the acronym of Advanced Vector Extensions), will be able to help the company surpass Nvidia's CUDA parallel computing platform in the long run.

But how? AVX-512 already supports Intel's Xeon Phi Knights Landing coprocessors, and it will start supporting the Xeon Scalable processors once they are available. Xeon Phi coprocessors are already throwing modest competition to Nvidia's GPUs with its parallel processing capabilities. Since GPUs are largely vector processors, in order to compete with Nvidia's parallel processing platform Intel's top priority was to develop a highly efficient software platform that supports complex vector operations.

Intel's earlier versions of AVX platform used to allow developers a modest degree of vector operations. The primary focus of the earlier versions was dealing with scalar operations at lower latency. However, the latest version, AVX-512, has been made to support 512-bit SIMD (Single Instruction, Multiple Data) instructions with significantly higher degree of vector operations. To learn more about AVX-512, click here. SIMD allows developers to build AI-driven apps based on instruction-level parallelism.

#3. As far as making its OPA compatible with parallel and sequential processing, Intel has done well. OPA is actually a high-bandwidth and low-latency fabric that offers modern datacenters PCIe adapters, switches, cables and management software which is highly scalable. Offering this degree of scalability isn't possible for Nvidia with just its GPUs and CUDA platform. OPA already supports Xeon Phi coprocessors, and the upcoming Knights Mill version will be made for AI-driven workloads. Now, by integrating its upcoming Xeon Scalable processors with OPA, Intel is further strengthening its long-term competitive advantage against Nvidia.

Investors' Angle: Is It The Right Time To Buy Intel?

INTC Revenue (TTM) data by YCharts

As I said, Intel is a different company altogether than it was couple of years ago. It is far more diversified than Nvidia. While it's true that Nvidia has made remarkable progress in terms of revenue growth since the beginning of 2016, sustaining such progress is almost impossible by depending on only a single product. In contrast, Intel's slow but steady progress is far more convincing.

INTC PS Ratio (TTM) data by YCharts

As far as valuation is concerned, Intel is enjoying a P/S multiple of merely 2.7x, compared to Nvidia's mammoth 12.5x. Clearly, there is huge upside left for Intel stock. Let's now focus on the extent of upside in the next 12-18 months. Assuming the HPC market will witness a CAGR growth rate of 5.45% until 2020, as mentioned in the report presented above, Intel's growth rate should also coincide with the CAGR figure of 5.45%. I believe the report is correct and reliable as far as the growth rate is concerned, because that is the consensus growth rate. However, looking at the market size it projected, it seems the report didn't take into account the 360 degree view of the hardware and software parts of the market.

Intel's overall HPC revenue consists of revenue from the traditional datacenter group, plus revenues from the IoT, PSG (programmable solutions group) and NVM (non-volatile memory) groups. As far as Nvidia is concerned, for being successful in high-performance computing in the long run, laying more emphasis on making high-performance storage including the latest kind of non-volatile memory is required. Unfortunately, we haven't seen any such initiative from Nvidia yet. Intel has made significant progress in this area with its 3D XPoint memory. Being a diversified player in the HPC space, it won't be difficult for Intel to achieve the 5.45% CAGR growth rate. During 2016, the company's HPC revenue was $24 billion, which should be around $28 billion in 2020. The IoT, PSG and NVM groups will be the new growth drivers.

Image Source: Author

At the same time, Nvidia's growth rate should also moderate and coincide with the industry's growth rate. If Mr. Market offers Nvidia a P/S multiple of 12.5x, why would Intel stock continue to languish in a narrow range? I expect Mr. Market will soon understand this and offer Intel a P/S multiple of at least 4x on a forward 12-month basis in the next 12-18 months. With the client computing group revenue remaining flat to slightly positive, the company's 2018 revenue should be around $63 billion and revenue per share should be around $13.40. At a P/S multiple of 4x, the stock should be well above $50.

In terms of technical analysis, Intel stock took nice support around the current level during the past 12 months. I strongly believe this is the right time for long-term investors to buy the stock.

INTC data by YCharts

Conclusion

To summarize, Intel is a diversified player in the HPC and AI market. However, investors are continuing to consider it as a traditional computing company. As this is no longer the case, I expect investors will gradually start to look at the company from a different angle. I am bullish on Intel around the current price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Intel: HPC And AI Are New Catalysts - Seeking Alpha