Intel Secures Major AI Chip Deal with IBM for Cloud Services

Intel Just Scored a Big AI Chip Customer | The Motley Fool

Chip giant Intel (INTC -8.80%) has lagged behind market leader Nvidia and rival Advanced Micro Devices in the AI accelerator market. As Nvidia churns out more than $26 billion of data center revenue each quarter and AMD remains on track to sell $4.5 billion worth of AI accelerators this year, Intel finds itself in a distant third place. Intel's new Gaudi 3 AI accelerator, which launched this year, is powerful and cost effective. However, winning customers is proving to be a challenge. Intel has said that it expects to generate just $500 million in revenue from Gaudi 3 sales in 2024, a pittance compared to Nvidia and AMD. While 2024 will be a tough year for Intel's AI chip business, 2025 is shaping up to look better. Last week, Intel and IBM (IBM -0.42%) announced a collaboration that will put Intel's Gaudi 3 chips inside IBM's cloud data centers. IBM will be the first cloud service provider to adopt Gaudi 3 when the collaboration bears fruit in 2025. In addition to IBM making Gaudi 3 chips available as part of its cloud platform, the tech giant is also integrating Gaudi 3 with its Watsonx AI platform. IBM has found a niche in the AI market by catering to enterprise customers and pairing its Watsonx platform with its vast consulting business. The company has so far booked over $2 billion worth of business related to generative AI. The plan is to use Gaudi 3 to lower the total cost of ownership for IBM's enterprise customers. AI chips from market leader Nvidia have become the gold standard but are also expensive. Intel has made a point to highlight the affordable nature of its Gaudi 3 chips, taking the unusual step earlier this year of publishing pricing for system providers. The company claims that an AI kit featuring eight Gaudi 3 chips is just two-thirds the cost of comparable competitive platforms. Notably, Gaudi 3 will be available for hybrid and on-premise environments as part of IBM's cloud offering. IBM's cloud strategy revolves around hybrid cloud computing, which combines public cloud computing with on-premises infrastructure. Hybrid cloud has become increasingly popular among enterprises with complex IT infrastructures. To say Intel is going through a rough patch would be an understatement. The company's turnaround, centered on its semiconductor manufacturing ambitions, is faltering. Intel announced extensive layoffs along with its disappointing second-quarter report, and the company is likely to sell assets and exit noncore businesses as it works to shore up its finances. The IBM collaboration is a much-needed piece of good news, and it is a sign that Intel's Gaudi 3 AI chips are an attractive proposition for cloud service providers. There was no talk of the scale of the Gaudi 3 deployment, but getting its AI chips into cloud data centers is a big win for Intel. While Intel's AI chip business won't move the needle this year, momentum is finally starting to build for the company's Gaudi 3 accelerators.

Intel to Deploy Gaudi 3 AI in IBM Cloud: Beneficial for INTC Stock? - IBM (NYSE:IBM), Advanced Micro Devices (NASDAQ:AMD)

Intel Corporation INTC recently inked a partnership with International Business Machines Corporation IBM to deploy its Gaudi 3 AI accelerators as a service in IBM Cloud. With this, IBM became the first cloud service provider to deploy Gaudi 3 across both hybrid and on-premise environments. Aimed to offer improved visibility and control over the software stack, simplifying workload and application management, the collaboration intends to help customers cost-effectively scale enterprise artificial intelligence workloads while prioritizing performance, security and resiliency. The offering, slated to be available by early 2025, is likely to pave the path for more innovations in Generative AI to help unlock its full potential. INTC Focusing on AI Processing Power Intel is scaling its AI footprint to edge devices and PCs with its Core Ultra processors, supporting more than 100 software vendors and 300 AI models. The new Lunar Lake architecture, featuring advanced graphics and AI processing power, promises significant performance and energy efficiency improvements. Additionally, Intel's updates on next-generation products across all segments of enterprise AI, including the new Intel Xeon 6 processors and Intel Core Ultra client processors, further solidify its position as a frontrunner in the AI revolution. The company has introduced the Intel Gaudi 3 accelerator and a suite of open, scalable systems for AI adoption across various sectors. Equipped with up to tens of thousands of accelerators interconnected through Ethernet, the Gaudi 3 accelerator promises a substantial boost in AI training and inference capabilities, enabling global enterprises to deploy AI at scale with ease. INTC's Short-Term Margins Compromised However, an accelerated ramp-up of AI PCs for an early-mover advantage significantly affected its short-term margins, as Intel shifted production to its high-volume facility in Ireland, where wafer costs are typically higher. Margins were also adversely impacted by higher charges related to non-core businesses, charges associated with unused capacity and an unfavorable product mix. In addition, more competitive pricing from rivals like Advanced Micro Devices, Inc. AMD and NVIDIA Corporation dented its profitability. Image Source: Zacks Investment Research Adverse U.S.-China Geopolitical Ties Hurt INTC China accounted for more than 27% of Intel's total revenues in 2023, making it the single largest market for the company. However, the communist nation's purported move to replace U.S.-made chips with domestic alternatives significantly affected its revenue prospects. The recent directive to phase out foreign chips from key telecom networks by 2027 underscores Beijing's accelerating efforts to reduce reliance on Western technology amid escalating U.S.-China tensions. As Washington tightens restrictions on high-tech exports to China, Beijing has intensified its push for self-sufficiency in critical industries. This shift poses a dual challenge for Intel, as it faces potential market restrictions and increased competition from domestic chipmakers. The second-quarter 2024 revenues, in particular, were unfavorably impacted by the revocation of certain licenses for exports of consumer-related items to a customer in China. Moreover, weaker spending across consumer and enterprise markets, especially in China, resulted in elevated customer inventory levels. Management expects customers to reduce inventory over the second half of the year, resulting in soft demand trends. Strict export control measures are further likely to affect the market dynamics, leading to below-par revenue growth in the near term, with the client business flat to down and modest growth in data center and edge markets. Knee-Jerk Reactions From INTC to Tide the Storm Intel is reportedly undertaking a comprehensive review of its businesses as it confronts severe financial difficulties and operational challenges. The company is mulling various options, including the potential split of its product design and manufacturing divisions and evaluating which factory projects should be terminated. The company is also considering the sale of its foundry operating segment that manufactures chips for external clients. The division incurred an operating loss of $2.8 billion in its recently reported quarter. One-Year Price Performance Over the past year, Intel has lost 39.8% against the industry's growth of 110.3%, lagging its rivals. Image Source: Zacks Investment Research Estimate Revision Trend Earnings estimates for Intel for 2024 have moved down 83.3% to 28 cents over the past year, while the same for 2025 has declined 41.6% to $1.08. The negative estimate revision depicts bearish sentiments for the stock. Image Source: Zacks Investment Research End Note Intel's innovative AI solutions hold immense promise for the broader semiconductor ecosystem. By addressing the challenges of scalability, performance and interoperability, it is paving the way for widespread AI adoption across enterprises worldwide. However, with a Zacks Rank #4 (Sell), it appears that the recent product launches are "too little too late" for Intel. In addition, margin woes amid strict export restrictions, unfavorable product mix and elevated customer inventory levels weigh on its bottom line. With declining earnings estimates and abysmal price performance compared with its peers, the stock is witnessing a negative investor perception. Consequently, it might not be prudent to bet on the stock at the moment. To read this article on Zacks.com click here. Market News and Data brought to you by Benzinga APIs