The Significance of Nvidia Passing Intel in Valuation

This week, news broke that Nvidia had passed Intel as the most valuable (by stock valuation) semiconductor company in the world. When I saw this, it was not a surprise but more of an inevitability I’ve felt for some time mostly because I read more notes from investment banks than I’d like to admit and the calls on Nvidia have been growing stronger for years as the datacenter, and cloud computing, has become a more critical growth sector for semiconductor companies.

While there is certainly a pure business analysis that is a part of this story, and this business end is what drives the stock, there is a sentiment part of this story that is a bit more telling, in my opinion.

From Client to Cloud
The first poignant thing to observe is the dramatic shift in value from the client, end computing devices, to the cloud. This is not to say end computing devices are not important, only that there is limited growth to be had going forward in client devices.

Another point to understand about cloud vs. client is while the addressable market for end-computing devices is dramatically larger than the market for cloud, one could argue price competition has stalled the pricing power of CPU/GPU components in client computing devices and therefore underscoring the point that growth has peaked and has for many years.

Prices for computing silicon in the cloud is significantly more expensive and has much higher ASPs than in client. Which is a primary reason the growth headroom in cloud and datacenter demand makes for such an attractive market at a business level and then by nature at a stock level.

When we break this point down, investors appear to believe Intel will not be among the biggest winners in this continued shift from client to cloud. Which on the surface is interesting since Intel owns ~90% of the datacenter CPU market, and has the majority share in several other components. However, they have no presence in the datacenter GPU category, which is notable from an analysis standpoint.

To further cement, this point about investor’s lack of confidence that Intel will grow in the cloud in some of the most profitable growth areas all we need to do is look at their P/E vs. Nvidia and AMD who both seem to have investor sentiment from a growth potential standpoint. AMD’s P/E is a crazy 132, Nvidia’s is 78, and Intel’s is 11. Now I completely understand P/E is just one telling indicator, and not the end number to look at, however, investing is all about betting on future profits and P/E tells part of that story. The relative P/E’s, in this case, tell us quite clearly investors believe AMD and Nvidia have more future profits to acquire than Intel does.

Rightly or wrongly, this is the story investment banks are telling their investors. But there is something more fundamental to this story that is worth highlighting.

Intel’s Lost Industry Leadership
The bigger part of the story to grasp is that Intel is not viewed as an industry leader in semiconductors any longer. To be clear, Intel is the market share leader in most metrics of product dominance. 90% share in data center CPU, ~90% share in PC CPU share, steady share of accelerators, memory, etc. Despite being the market share leader in most computing categories, Intel is not viewed as a leader in terms of innovation.

The criticism over the decade has been that Intel has lost its vision and has been run more from an operational perspective rather than an innovation drive. Their string of more operational CEOs is where the finger has been pointed, as critics point out a more engineering-driven CEO may have put more focus on innovation than just business operations.

I’m not sure where I fall in this debate to be quite honest. Mostly because you could, and many do, argue that Apple has a more operational CEO than a product/engineering focused CEO, and yet Apple is still viewed as pushing innovation in many areas. Of course, Tim Cook gets his criticism, and many hardcore Apple critics claim Apple needs a product/engineering minded CEO, but the point is that even with an operational focused CEO, Apple still has industry leadership accolades in many areas. All that to say, I’m not sure the CEO point about Intel is the reason their leadership position has declined in terms of outside sentiment.

On this point, I want to briefly point out a common criticism of Intel where they lost leadership in process technology having TSMC and Samsung beat them to 10nm and to 7nm. Folks will point out Intel’s missteps in getting to 10nm as evidence of this lack of engineering/innovation focus. However, company commentary has clearly stated their troubles with 10nm is a result of being overly ambitious in their density goal. Which, if true, would indicate an attempt to further push innovation despite it not working. Which, unpacking why may make for an interesting case study someday.

Now, all that said, even if Intel had process technology leadership, I’m not sure the narrative of lost leadership as an innovatory would have been gone. Leadership in the semiconductor industry has moved beyond just performance per watt. The reason the market is so excited about Nvidia is because the view is their technology sits at the center of some of the most exciting new technological advances. Things like AI/ML, robotics, automation, and a host of other exciting new areas for computing.

Nvidia’s technology being viewed as fundamental to spurring innovation and bringing new applications for technology is a key reason for the continued positivity in investor sentiment. It also helps Nvidia has a visionary CEO who is eloquent, passionate, engineering-driven, and a proven track record in placing strategic bets and having those bets pay off.

Intel’s story is not done, far from it. However, their competition has never been stronger. The industry is getting bigger and more challenging as a whole. Intel still has a chance to get back in the driver’s seat, but it will take a unique combination of vision, engineering innovation, and execution.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

6 thoughts on “The Significance of Nvidia Passing Intel in Valuation”

Leave a Reply

Your email address will not be published. Required fields are marked *