Intel INTC and Advanced Micro Devices AMD have been growing closer together for some time, especially in areas like gaming PCs and laptops. They've also let on that they wouldn't mind working together. So the rumor that they now have a deal covering AMD's graphics technology doesn't come as a very big surprise.
Particularly so because Intel was forced to pay NVIDIA $1.5 billion over 5 years for its graphics technology that it reportedly didn't use. The other part of the deal involved NVIDIA NVDA staying away from the CPU market, which is probably the main reason Intel agreed to pay.
GPU power was talked about a lot in those days as companies realized for the first time that a GPU was a more efficient processor because it allowed simultaneous operations (typically required in graphics processing). CPUs were limited because they processed data serially, which slowed them down somewhat in comparison.
For NVIDIA, it was also not a bad deal because the company turned focus on the data center and high performance computing (HPC) segment, where of course GPU technology proved extremely effective.
The interesting thing is that the companies are inter-dependent. NVIDIA has come a long way with its technology despite ceding share to AMD in game consoles. Today, it is the go-to vendor for companies investing in artificial intelligence and machine learning. At the same time, this technology is used on top of Intel technology at the core. Similarly in PCs, Intel's integrated graphics is built on top of technology it built but which infringes on NVIDIA patents. So Intel had to pay NVIDIA.
It can be argued that Intel and NVIDIA would rather do without each other now because they are increasingly fighting for the same sockets as Intel targets the high-margin HPC segment and in self-driving cars with NVIDIA protecting its turf. This situation should change however because customers generally welcome competition to keep prices under control.
For Intel, a deal with AMD would seal things in the PC/laptop segment because a chip integrating Intel CPU and AMD GPU technology would be very powerful indeed. And since most of the growth in the PC market is current coming from the gaming/enthusiast segment, the combination would be a runaway success. Moreover, AMD and NVIDIA are believed to have competing and infringing graphics patents such that litigation would create problems for both. Therefore, Intel can easily replace NVIDIA with AMD.
For AMD, it's a coup, because the company will now immediately dominate the PC graphics segment. Perhaps I shouldn't say dominate because we don't know the extent of Intel's integration with AMD technology, if at all. But at a minimum, AMD will get a royalty on every Intel integrated graphics chip that's sold. And that is a very big deal. It could boost its margins and cash flow, and also help it deleverage the balance sheet.
But what about its own APUs one might ask. Won't the Intel-integrated graphics chips kill any chance AMD had with its own APUs? The answer is pure mathematics. AMD had two choices: first, partner with Intel for income from 80% of the market or second, compete with Intel for the remaining 20%. AMD chose the former.
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Qualcomm QCOM is another company looking to enter the HPC segment leveraging ARM technology
Of the companies discussed above, NVIDIA is the only one with a Zacks Rank #1 (Strong Buy), although there are other chip stocks like Texas Instruments TXN and STMicroelectronics STM that also have Buy ranks (Zacks Rank #2). Or, you can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.