Brilliant New Chip Design Helps Taiwan Semi Squeeze Intel
They way computers think is undergoing a profound change and that is a really big opportunity for Taiwan Semiconductor Manufacturing (NYSE: TSM), an Asia microprocessor contracting company.
At the AWS re:Invent conference on Tuesday, managers revealed AWS Trainium, a custom-made computer chip for running high-performance tasks at data centers.
The future of computing is here.
Goodbye Intel (Nasdaq: INTC). Hello made to order.
That assessment may seem a bit extreme. Intel is the world’s largest vertically integrated semiconductor company.
The company still designs, makes and markets the brains for most of the world’s personal computers and data centers. It’s a robust business that generated $71.9 billion in sales during 2019. Managers are projecting flat sales in 2020.
The problem is Intel’s best customers no longer need nor want the company to design and make high-performance silicon for next-generation applications. They have moved on designing bespoke chips to suit those needs.
Worse, they are not even using Intel’s x86 chip architecture.
Amazon.com (Nasdaq: AMZN) began designing custom chips in 2019 based on architecture from ARM Holdings, best known for its extremely power efficient platform. As the market for smartphones exploded starting in 2007, ARM quickly won share. Today, virtually all iPhone and Android mobile devices run ARM chip designs.
Until very recently, companies have struggled to scale up ARM chips powerful enough to run demanding workloads at data centers. So, AWS built Trainium specifically to run its machine learning framework. The hardware and software are designed from the ground up work as a cohesive unit.
Andrew Jassy, chief executive at AWS, said Tuesday that the combination is capable of processing 1 trillion calculations per second. He claims this will provide the highest performance and computing power for machine learning in the cloud industry.
With $39 billion in sales, AWS is a unique business because customers are billed on a pay-as-you-go basis. Billing expands or contracts based on real-time usage.
The initial appeal to large enterprises like Netflix (Nasdaq: NFLX), Facebook (Nasdaq: FB) and the BBC was always having exactly the right amount of bandwidth capacity. The elasticity eliminated outages while ensuring smooth user experiences.
As the scope of cloud computing evolved and costs declined, many businesses migrated more intensive tasks to the cloud. Recommendation engines, natural language processing, image classification and other applications dependent on machine learning now live in the cloud.
Speeding up these apps is the future of computing … and Jassy says it will run on ARM.
It’s a big change with huge implications. Intel owns 90% of the data center chip market. Most of the rest is made up by Advanced Micro Devices (Nasdaq: AMD), according to a Nov. 2019 report from Reuters. Both firms make chips based on Intel’s x86 chipset.
Last month, Apple (Nasdaq: AAPL) revealed new laptop computers running M1, its first ARM-based chip for nonmobile devices. Benchmarks showed that the machines were 3 times more powerful than their x86 cousins. They also scored 20 hours of battery life while running so cool some units didn’t even require fans.
Intel will release updated chips. It’s the nature of competition. However, the damage is done.
Both AWS and Apple cracked the code by marrying custom-made silicon to specific applications. Made to order ARM processors will become the norm for high-performance computing.
Taiwan Semiconductor operates the world’s largest for-hire semiconductor foundry. Its technology lead is formidable. And the Asian company has all the biggest clients, including Apple, AWS, Qualcomm (Nasdaq: QCOM), Nvidia (Nasdaq: NVDA) and even AMD.
Through the second quarter of 2020, TSM had a 53.9% share of the global semiconductor foundry market. Of the $20.2 billion in sales during the quarter, 96.1% were attributed to the top 10 firms.
The company began shipping leading edge 7 nanometer chips during the first quarter of 2020. Managers said that 3 nanometer chips should begin shipping in the second half of 2022. Intel is still struggling to make 10 nm chips at scale.
I have favored TSM stock for a long time due to its scale and technology lead. Shares trade at 28 times forward earnings and 10 times sales, with recent prices per share near $100. That’s a bargain given the big shift to custom silicon that lies ahead.
Savvy investors should buy any significant near-term weakness.
Jon D. Markman