Intel and Microsoft are on different paths to profit from AI. One will be right.

By Ryan Shrout

Tech giants' recent earnings reveal a clear winner in market leadership and momentum

Intel Corp. and Microsoft Corp. are painting two opposite pictures of the state of artificial intelligence right now.

Intel's (INTC) first-quarter earnings report last week was mostly positive - with year-on-year gains in revenue, operating income and even gross margins - but showed a regression linearly. The new Intel Products group (which was recently separated from the foundry/production business as part of a new reporting structure) brought in $7.5 billion, with $2.6 billion in operating income.

Considering that the consumer-facing AI business and the AI PC is really just starting its upward march, I would expect Intel's client business to continue to gain momentum with its currently shipping Meteor Lake platform and the upcoming Lunar Lake designs, which analysts say will be available by the end of the year.

The data-center group at Intel, DCAI, continues to struggle, with $3 billion in revenue and $500 million in operating income. This stagnation is worrisome, as data-center profits are growing at rivals Nvidia Corp. (NVDA), Advanced Micro Devices Inc. (AMD) and others.

Intel CEO Pat Gelsinger continued to promote the recent launch of Intel's Xeon 6 family of data-center CPUs and the upcoming Gaudi 3 AI accelerator solution, but even this will bring in only around $500 million of revenue to the company this year. For comparison, AMD is expected to see about $3.5 billion in revenue from its MI300X GPUs, while Nvidia will enjoy upward of $45 billion to $50 billion in revenue from its AI products this year.

The fact that Intel's second-quarter outlook was flat clearly showed the markets that the chip maker doesn't have a clear line of sight for how it will take advantage of the AI market in 2024 just yet, which is a bit of a letdown considering its position of strength in the client space.

Microsoft moves ahead

The story that Microsoft (MSFT) painted was very different, both in results and in outlook for the rest of the year. Microsoft in its first quarter had close to $62 billion in revenue and $27.6 billion in operating income, with a gross margin of 70%. All three of the company's business divisions grew year over year: the productivity group by 12%; intelligent cloud by 21%, and the More Personal Computing group by 17%.

The highlight was the growth in the Azure and cloud-services category, which saw a 31% revenue increase and alone brought in more than $26 billion in revenue.

The only segment that showed weakness was, interestingly, the devices group - which includes Microsoft's Surface laptops, where revenue fell by 17% year over year. Much like Intel and its client AI PC revenue potential, the Surface group is riding on hopes that its pending system refreshes for consumers (and the recent release of new business PCs) will benefit from the AI PC phenomenon expected in the second half of 2024.

Intel is running out of runway to get customers on board with its strategy for AI.

These are interesting results, but what does this tell us about the AI market now? Almost all the massive growth and expansion of investment has come in the data-center space, but also in results like what Microsoft and its cloud division posted. Also, don't forget that Microsoft is investing another $14 billion in infrastructure capital expenditures next quarter, its highest amount ever, so it clearly sees the revenue growth continuing.

So why isn't Intel seeing a parallel path to its data-center AI ambitions? Intel can't continue to lean on the idea that it isn't profitable, as Microsoft is significantly outspending them. Intel has tried pitching the market on the value of its CPUs for AI inferencing; it attempted to launch a family of data-center GPU products to directly compete with AMD and Nvidia; and now it's hoping that the next generation of Gaudi accelerators will finally make a move. Whatever product family it ends up being, the fact is that Intel is running out of runway to get customers on board with its strategy for AI.

But client and edge computing has not seen that same rise in investment or sales as the data center, at least not yet. Here, we need to see tangible proof that what Intel, AMD, Qualcomm Inc. (QCOM) and their partners are saying about the AI PC and its capabilities will convince consumers and businesses that they need to upgrade to new AI-enabled machines.

Microsoft Surface will be looking for that same bump from the AI PC supercycle, but it has the benefit of its market-leading data-center solutions and software businesses. Meanwhile, Intel needs to see success and significant design wins with its Gaudi 3 AI accelerators and revenue with AI-powered client devices in the next 12 to 24 months, to give the market confidence that its product group can flourish.

Ryan Shrout is president of Signal65 and founder at Shrout Research. Follow him on X @ryanshrout. Shrout has provided consulting services for AMD, Qualcomm, Intel, Arm Holdings, Micron Technology, Nvidia and others. Shrout holds shares of Intel.

More: Nvidia is chip sector's only hope after AMD and Super Micro disappoint

Also read: AMD's mixed earnings reveal a company with a lot to prove - and the goods to do it

-Ryan Shrout

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05-04-24 1131ET

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