Published: April 30, 2020
This earnings season is the first to offer a reading on the impact of a pandemic that knocked the world economy back by years. And from all that, the financial results at some major chipmakers tell us not the slightest wrong is with the world: revenue is at or near record levels, and the outlook is upbeat.
The 451 Take
Datacenter Capacity Demand is not a Tailwind, it's more like a Jet Stream
The makeup of the economy is changing apace with the benefit of online services and the increased use of IT, which lifts the already high demand for computer chips higher still. A combination of pent-up capacity demand, new technologies, and accelerating uptake in online services due to the pandemic has formed a supercycle for datacenter chips never seen before. Businesses and households are relying on telecommunications and IT more than ever.
Take Intel, the world's largest maker of processors by revenue, and a bellwether for global market trends. The company saw its datacenter revenue approach $7bn in the first quarter of 2020, a jump of 43% compared to the same period the year before. While the comparison benefits from a weak start in 2019 as some large buyers slowed purchases to absorb the inventory amassed in 2018, a similar dynamic was in place in the second half of 2019, when Intel's semiconductor shipments to datacenters grew to record levels.
Yet, the march has continued unabated. The first quarter proved to be unseasonably strong and became the second best-ever quarter for Intel's datacenter group – driven primarily by cloud service providers and telcos, which together represented 70% of its quarterly datacenter revenue. Intel benefited not just from selling more chips, but from a richer product mix skewed toward high-end (e.g., 28 processor cores per silicon die) server models, because service providers are able to monetize such models better, while enjoying substantial density and energy efficiency benefits at the scale at which they operate. Intel has sold $26.7bn worth of semiconductors into datacenters over the past 12 months, up 13% against the previous 12-month period, which suggests it still has ample room to grow into, given it is still far from the historical growth highs seen in 2018.
The wider market picture is even more bullish. Up until recently, Intel used to be the only game in town for volume servers, but not anymore. Executing on a new chip development strategy, fabless chip designer AMD has mounted a successful comeback in server processors with an eye on scale-out infrastructure, namely cloud and HPC. An analysis by 451 Research suggested that AMD's current server chips closely match Intel in performance, but are denser and more energy efficient when highly utilized – and are for the most part available for less.
Buyers have taken notice, and AMD's datacenter revenue has ramped up considerably, gaining share against Intel even during Intel's record quarters. It shot even higher in the first three months of 2020. AMD said its first-quarter server processor shipments more than tripled compared to the first three months of 2019, and its total datacenter revenue was around $370m (451 Research estimate, based on company disclosures). This means that the ramp in global datacenter computing was even steeper than that suggested by Intel's financials.
Experience has taught firms and investors to fear such great heights for a reason – it only takes a few major buyers to put a dent in the datacenter infrastructure market. However, both Intel and AMD see strong demand signals into the second quarter, and say there is no clear sign of weakness going into the second half. The risk that cloud operators will slow down either due to capacity absorption or waiting for Intel's upcoming 10-nanometer server technology generation remains, but AMD's continued shipment ramp to cloud providers will make up for at least a part of such weakness – on balance, while Intel's financial performance is at some risk, the market is much less so.
The world's largest contract chip manufacturer, TSMC, also saw strength in demand from its customers (predominantly NVIDIA and AMD) for high-performance logic, such as server and PC processors, graphics processing units and application-specific integrated circuits. In fact, this business saw its best-ever quarter, outpacing the third and fourth quarters of last year. The second quarter will see even higher shipments in this segment, TSMC said, and the company has confirmed its full year forecast for high-performance chips against a backdrop of downgraded demand for chips in smartphones, automotive and IoT applications.
Finally, this week saw the world's two largest memory makers, Samsung Electronics and Hynix, report their first-quarter results, corroborating the story of datacenter and home computing strength against the backdrop of a pandemic-stricken economy. On balance, the view for both DRAM (used primarily for operational memory) and NAND flash (mostly for data storage in solid-state drives) is positive. Capacity growth in datacenter applications and PCs for remote work, more online commerce and entertainment will offset lower demand for smartphones and automobiles. This demand, however, is incremental in adding to already strong fundamentals from cloud and other services providers, notes Hynix.
Daniel Bizo is a Principal Analyst for Datacenter Services & Infrastructure Channel at 451 Research. His research focuses on advanced datacenter design, build and operations, such as prefabricated modular datacenters, highly efficient cooling and integrated facilities and IT management to achieve superior economics. Dan is also a member of 451 Research’s Center of Excellence for Quantum Technologies.
Jeremy Korn is a Research Associate at 451 Research. He graduated from Brown University with a BA in Biology and East Asian Studies and received
Aaron Sherrill is a Senior Analyst for 451 Research covering emerging trends, innovation