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Shares of (INTC) are down 45 cents, or 1.2%, at $35.75, after Bernstein's Stacy Rasgon cut his rating on the shares to Underperform from Market Perform, after concluding the company's facing a bad "" where its chip franchise is "cracking," it has nothing to replace in similar volume, its vaunted advantage in manufacturing means less and less, and its stock is expensive.

"Datacenter is showing real signs of cracking," writes Rasgon, "competition is increasing, growth opportunities are declining in quality, and competitor advantages in design/architecture are beginning to blunt whatever process advantages the company has left."

"In that context valuations (currently at decade-long highs on EV/FCF) seem unsustainable, and ripe for re-rating."

The stock, he writes, sports a , even though he thinks the bull arguments for Intel have "one by one" been "knocked down":

One by one these cases have been knocked down. PCs peaked in 2011, and the argument now is not whether they will grow again, but rather around how rapidly they might decline. Datacenter growth goals have never played out as expected, and have now been reset in more ways than one. New growth opportunities are coming with increased investment levels, and worse economics, than the current business. And not even mighty Intel can keep pace with Moore's law, suffering significant problems yielding 14nm, and stretching out their migration cadence while competitors attempt to pull their own trajectory in. Competition is increasing across all major portions of the business to levels we haven't seen in years. And spending (on both opex and capex) is hitting new records as Intel fights to keep their moat wide. This doesn’t sound like a company in their best position in years. And yet valuation tells a different story. While relatively inexpensive on (recently-adjusted) earnings, cash isn't fooled by accounting changes or capex increases, and INTC's stock trades at near decade-long highs on EV/FCF (>18x, close to where TXN is trading). This makes no sense to us. With what appears to be the start of a potentially multi-year structural case beginning to play out, we could be in front of a multi-year re- rating as well.

Rasgon digs into :

The company has reset growth goals (low double digits over the next 5 years, down from 15%+). But even sustaining these lowered growth targets relies heavily on "adjacencies" (memory, silicon photonics, etc) which are less attractive than CPUs. Additionally we are seeing an increasing number of credible competitive threats emerge, including AMD (with their first major offering in half a decade) and NVDA (whose GPU offerings appear preferable in high growth AI efforts where INTC seems to be on their back foot), not to mention internal activities at customers, renewed efforts out of China, etc. As a result INTC is spiking investments here, pressuring margins. Further risk exists not only from possible share losses, but also from pricing pressure, should new competition, in whatever form, prove credible enough to crack Intel's strong pricing umbrella.

Rasgon, although still somewhat skeptical about competitor (AMD), sees that company's forthcoming server chip offerings as a definite threat:

While we have too much history with Advanced Micro Devices to get behind the AMD bull case, it is apparent that the market is willing to believe. And if the market is right, especially on AMD's server offerings, we see few scenarios where this doesn't translate into problems for Intel given they currently own more than 99% of the marketplace. We note that the last time AMD launched a high end desktop and server chip was in 2012, and the company has since been limping along in those markets and ceding share to Intel (indeed, today AMD is virtually an afterthought in servers).However, the newest Zen products have just had their official launch (initially for high-end desktop), with a 52%+ improvement in instructions per clock on the back of a brand-new architecture and a 2-node process jump. This puts AMD products (at least in theory) back in competition with Intel, whose own IPC improvements over the past couple of years have been marginal at best, and minimal over the last few generations. AMD's new Ryzen products' initial performance, power envelope and pricing looks (at least on the surface) decently positioned vs comparable Intel chips in the high-end desktop space, at lower price points (Exhibit 10), and we'll see how they do in practice once shipping in high volume. Success in desktop, if it occurs, will potentially foreshadow future success in server (with Naples server chips launching in Q2, and likely ramping into the 2H and 2018).

He notes, too, the rise of alternatives in the data center in the form of :

Additionally, the company faces further competitive challenges. Customers are beginning to build custom chips for specific workloads (we note for example Google's Tensor Processing Units for machine-learning applications, and Amazon's renewed semiconductor efforts). Google is also pushing their efforts in the OpenPower alliance, with servers (based on the Power9 architecture) coming soon. Qualcomm has taken up the ARM mantle with their own server efforts. And China appears to be making their own push, both on ARM (including a JV with Qualcomm) as well as x86, having licensed x86 server IP from (again) AMD3.

In addition, Rasgon sees the company's long-time lead in semiconductor meaning less and less as chip "architecture" takes over and Moore's Law slows:

For example, AMD's Ryzen chip squeezes 4.8b transistors into a ~195mm die size (~25M transistors per mm2), significantly more than Intel's high-end Broadwell (3.4B transistors in 246mm2, or ~14M transistors per mm2). With Skylake INTC ceased providing transistor counts, but we have little reason to believe density metrics have been hugely improved. While metrics like this are admittedly crude, they point to the fact that Intel's theoretical density arguments are likely less important in practice; in the real world their architecture (which will remain relatively unchanged through the Skylake, Kaby Lake, and Coffee Lake generations) appears demonstrably less efficient than the competition. And this feels like a problem. Intel has always been a fab company. They continue to think of themselves as a fab company. But in a world where process technology migration is slowing, design expertise and architecture are likely to become more critical, and the company cannot make claims of superiority on that front; indeed, they have chosen this moment to de-invest in their PC efforts (where until this point has borne the brunt of their microarchitectural efforts).