Coffee Lake Chips Could Boost Intel Corporation's Profitability

  • Intel's Coffee Lake chips could bring '6-core' chips to the mass market by 2018.
  • Move would help in quashing competition from ARM, its partners and by AMD.
  • These chips might as well boost Intel's profitability and also lift Intel stock higher.

It looks like Intel Corporation (NASDAQ:INTC) is upping the ante. The chipzilla has historically reserved its 6-core SKUs primarily for its limited “Extreme Edition” line of CPUs that usually come with exorbitantly high price tags. But things might change soon. Recent Intel presentation slides reveal that the chipmaker could be bringing its 6-core chips to the mainstream market in 2018 with its purported release of Coffee Lake chips. This could be a game changer for Intel and a nightmare for Advanced Micro Devices, Inc. (NASDAQ:AMD). Here’s why.



The game of costs

Let me start by saying that high-performance 6-core+ parts from Intel are currently quite expensive. For starters, Intel’s 6-core 3960x Extreme Edition chip retails for about $690 while its top of the line, mainstream, i7 chip branded as 6700k is retailing for almost half, at $346. This massive price discrepancy largely forces the vast pool of performance and gaming enthusiasts to just stick to Intel’s quad-core CPUs.

But by bringing the hexacore Coffee Lake chips to the mass market, we could very well see the pricing discrepancy shrink a bit. As the 6-core chips get into volume production, Intel would achieve economies of scale and it would be in a position to pass on these cost benefits to end users. This essentially means that we’ll be able to enjoy the performance of desktop-class 6 core chips by paying only a slight premium post-2018.

The number of transistors on quad and hexacore chips would largely stay the same (since it would be a mainstream chip) and only physical cores would be added on the Coffee Lake lineup. This leads me to believe that IC fabrication costs won’t increase by much. But these chips would be able to command relatively higher price tags, compared to Intel’s quad core i7 chips, due to their higher number of cores. So altogether the Coffee Lake lineup might help in boosting Intel’s profitability and its average revenue per chip.

Intel already maintains 2, 4 and 6 core dies at its manufacturing facilities. Allocating more production at its 6 core lines and reducing the work load on its 2/4 core lines would be a great way to balance out its production lines and get a higher overall factory utilization rate, without significantly adding to the chipzilla’s fixed costs or capital expenditures. After all, the manufacturing equipment is already in place.

Competitive edge

But that’s not all. We’ve seen over the last few quarters that ARM and its partners have slowly been creeping into the server market. At this point, it’s too early to say whether their endeavors would succeed or not. But if things go well, ARM and its partners might want to try their hand at the desktop class of CPUs. So Intel’s move to introduce 6-core chips for the mass market can be seen as a preemptive measure to curb any potential incursion by ARM into the desktop segment. Intel’s x86-based 6-core chips would further increase the performance-linked barriers to entry for ARM or its partners such as Qualcomm, AMD and Cavium.

More to the point, GlobalFoundries and Taiwan Semiconductor have been aggressively ramping up their capital expenditures and rapidly closing in on Intel’s manufacturing lead. I’ve already discussed this part in detail here so I won’t go over it again. But the gist of it all is that with AMD moving onto the latest manufacturing nodes, its Zen and other future offerings could pose a credible threat to Intel's offerings performance wise. Once both chipmakers are on the same node, probably around late 2017, the playing field will be levelled and the real determinant in chip performance would be chip architecture.

I believe that Intel’s move to introduce 6-core chips would also help in defending market position against AMD. The latter hasn’t been able to catch-up with the chipzilla in terms of performance for the most part of the past decade, even by launching higher core chips. This essentially means that the introduction of 6-core CPUs would make it harder for AMD to catchup with Intel anytime soon, unless the former goes back to the drawing board, redraws its product strategy and decides to increase its core count even further.

Putting pressure on the little guy

This is easier said than done though. AMD already manufactures 4, 6 and 8 core chips and its worth noting that there are associated costs with each of its aforementioned production lines. Adding another line of say, 10 or 12 core chips, would further add to the financially-stressed company’s fixed cost structure while providing no sort of guarantee that its new chips would receive critical acclaim from technology enthusiasts.

This is sort of a catch-22 situation for AMD. If it doesn’t release higher core CPUs, Intel’s 6-core Coffee Lake CPUs might make its entire line of high-performance chips irrelevant. On the other hand, if AMD does release higher core CPUs, its manufacturing costs could increase substantially and the company will have to design and maintain its architecture for another line of processors. The increased costs could further put pressure on AMD’s bottom-line thereby delaying the timeline for its return to profitability.

Put it all together

Intel’s decision to introduce more cores would not only boost profitability and keep its competition at bay, but it would also provide a compelling reason for its users and loyalists to upgrade their CPUs going forward. The performance gains from higher number of cores on the new Coffee Lake chips might trigger a major refresh cycle for Intel. Altogether, I see this as a great move by Intel (if the slides are true).

Piyush Arora Piyush Arora   on Amigobulls :
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