The Server Recession Ends, And Both Intel And AMD Won

XYang2023 · Nov 12, 2024

Anyone who thinks that Intel is easy to kill need look no further than the historical trends of the Mercury Research market share statistics that we see each quarter. Data for the third quarter of 2024 was just announced, and we have paired this with historical trends in shipments and revenues from Gartner to give you a sense of what the heck is going on with X86 CPUs in the datacenter.

To gather up this data, we had some help from Aaron Rakers at Wells Fargo Equity Research, who watches the semiconductor space like a hawk and loves building thorough and complex spreadsheets and charts and tables as much as we obviously do.

And, importantly, the Mercury Research data about X86 server CPU shipments and the revenue streams they generate show one important statistic: No matter how much AMD has gained, three quarters of the X86 CPUs supplied to the datacenters of the world still say Intel underneath their heat sinks.

AMD has been able to do better than that share on server CPU revenue streams, which is also interesting. We think that this is because the “Milan” and “Genoa” generations of Epyc processors, which are more heavily cored processors than the Xeon processors announced at the same time, are sold with better price/performance against higher throughput and make it up with higher average selling prices despite the deep discounts that the hyperscalers and cloud can command when they buy compute engines. And as enterprises are increasingly adopting AMD server CPUs, the revenues and margins for AMD and its OEM partners are also going up because these customers do not get the steep discounts that the hyperscalers and cloud builders do.

Here is the latest breakdown of AMD and Intel X86 server CPU shipments according to Mercury Research:

In the third quarter, Intel shipped 4.09 million X86 server CPUs, which was up 15.3 percent year on year and up 9.8 percent sequentially from the 3.55 million chips that the company got out the door in Q3 2023. As you can see from the chart above, which shows a kind of Mandelbrot fractal line chart of Intel and AMD market share overlaid on top of a bar chart of aggregate X86 server CPU shipments from Q1 2001 through Q3 2024, it looks like Intel bottomed out in Q3 2023 and again in Q1 2024, when it sold 3.46 million CPUs. Clearly, the “Granite Rapids” and “Sierra Forest” Xeon 6 processors are being better received than their “Sapphire Rapids” predecessors – at least from the early data. We will know more for sure when we see Q4 2024 and Q1 2025 data.

In terms of shipments, AMD actually grew slower than Intel in the third quarter of this year, but kept pace just fine. According to the Mercury Research data, AMD peddled 1.39 million Epyc processors in Q3 2024, up 14.4 percent year on year from 1.22 million CPUs in Q3 2023 and up 7.1 percent sequentially from Q2 2024. Total X86 server CPU sales in the period rose by 15.1 percent to 5.48 million units, which was also a 9.1 percent sequential bump.

Now, when you start talking about money, Intel is not doing so well, and our financial analysis for Q3 2024 for Intel (see here) and for AMD (see there) showed this very clearly. Take a gander at the revenue streams from those X86 server CPUs over time:

In the third quarter, it looks like Intel Xeon server CPU revenues went down by 1.4 percent to $3.51 billion, which was nonetheless up 6.9 percent sequentially, matching the sequential revenue pace for X86 server CPUs overall. AMD has an easier compare because its market share was lower a year ago, and its Epyc CPU revenues rose by 20.7 percent year on year to $1.8 billion, but it also only had 6.9 percent growth sequentially. Overall X86 server revenues were up by 5.1 percent to $5.31 billion, according to the data compiled by Wells Fargo.

Once we have cased the relative positions of AMD and Intel in X86 server CPUs, what we then want to know is how are the revenues stacking up for the boxes that use those server chips. (There is obviously some lag in the data here, because a CPU sold in Q3 doesn’t necessarily end up in a server sold in Q3.) And thankfully, Wells Fargo has access to the Gartner server shipment and revenue data up through Q2 2024. The Q3 2024 data is not out yet because most of the server OEMs and ODMs have no reported their financial results as yet for the quarter ended in September.

Just because we can’t stand waiting, we have estimated shipments and revenues for Q3 2024 in the chart below based on historical trends and rising ASPs for machinery as more and more AI servers are sold by the ODMs and OEMs and sometimes by chip makers themselves. (Particularly Nvidia with its DGX line.)

If we assume that the average selling prices of servers stayed around the same in Q2 2024, then we think that $38.7 billion in servers were consumed in Q2 2024 against the 2.72 million machines that Gartner says were sold. (We are not sure why Gartner’s revenue data for Q2 was not in the Wells Fargo dataset, but we filled the pothole.) If you assume that ASPs are staying the same and that overall server shipments will map to the Mercury Research X86 server shipments above, then around 3 million servers went out the door in Q3 2024, driving $42.2 billion in aggregate sales worldwide.

That is a 13.9 percent increase in X86 server shipments and a 39.4 percent increase in X86 server revenues year on year. And this chart obviously ignores the growing numbers of Arm-based servers being deployed at the hyperscalers, cloud builders, and HPC centers of the world as well as a small steady state of relatively expensive Power and z mainframe systems from IBM.

The chart above shows Gartner data running from Q1 2002 through Q3 2024, including our estimates to fill in the potholes.

Here is one of the neat things about this data. You can see how much the average CPU represented of the cost of an average server over time. If you do the math, back in 2002, the CPUs represented around 10.5 percent of the cost of the system, and by the time AMD was strongly in the market in 2004 and 2005, with lots of cores and better designs than Intel, that rose to just above 15 percent of the overall server price. As workloads grew at hyperscalers and cloud builders, sales of higher-bin server CPUs helped raise the CPU share of the server to the low 20 percent range, and by the time AMD Opteron was pretty much vanquished from the market in the wake of the great recession, the lack of competition and the need to cram more compute in a box put that share well above 30 percent of the cost of the system.

If you are wondering why the hyperscalers and cloud builders want their own Arm server CPUs, there is your answer. In the absence of competition, Intel charged a very high price for its CPUs. And its financials in the 2010s show this.

By the late 2010s and early 2020s, AMD is back in the market, Arm server chips are a viable option, and customers are not in a mood to pay a lot for a CPU because in many of their servers they need to spend big bucks on GPU accelerators and advanced networking to build AI clusters. And so the X86 CPU share of X86 server costs plummets in early 2022 to below 20 percent of the cost of the system and has done a step function down again to about 12 percent in 2024.

This Gartner data also shows something else. The server shipment recession in the wake of the GenAI boom was much worse than the dip in server shipments in the wake of the Great Recession in 2008 and 2009. During the Great Recession, there were four quarters of double digit shipment declines and five quarters of revenue declines with four of those being double digits. (Revenues collapsed one quarter earlier than shipments did.) If the shipment levels had stayed constant at 2.2 million units in late 2008 and early 2009, then around 1.65 million more servers would have been sold. That removed something on the order of $5 billion in X86 servers from the market. You can see the hole in the chart above.

Because the hyperscalers and cloud builders are high volume and capricious server buyers, who tend to be at the front of the line for generations of CPUs, we actually see X86 server shipment recessions – meaning at least two quarters of consecutive decline – many times in the past decade. To be specific, we have three quarters of consecutive server shipment declines from Q3 2016 through Q1 2017, and another one from Q1 2019 through Q3 2019. There is a four quarter shipment recession that runs from Q3 2020 through Q2 2021. And there is a five quarter server shipment recession from Q4 2022 through Q4 2023 which absolutely coincides with the GenAI boom.

With the earlier server shipment recessions, there is often a quarter of revenue declines but not a true recession with two consecutive quarters of decline. Revenues get weaker nonetheless. But not in the GenAI boom, where ASPs keep growing and growing as the GPU, memory, flash, and networking content in AI servers keeps growing fast.

Anyway, if you assume an average quarter should see 3.2 million servers being shifted, then the shipment recession plus the last two quarters of below average shipments probably removed somewhere between 4.5 million and 6 million servers from the market to help pay for AI servers. That is probably on the order of $4.5 billion to $6 billion in general purpose machinery that was not sold. That is a much larger number of servers that were not sold than happened in the Great Recession, and very likely a larger amount of revenue lost, too.

The good news is that it looks like the underlying X86 server shipment recession ended in Q2 2024, which should help the profitability of both Intel (which needs it badly) and AMD (which also needs it). AMD won by gaining so much share, and Intel won by staying in the game despite the failures of its foundry, which made its products uncompetitive.

We look forward to seeing what happens in Q4 2024 and if Intel can reverse some of those difficult trends in the charts above. We still think that there is a high likelihood of a 60-40 or 50-50 spilt between Intel and AMD over the longest of hauls in the X86 server CPU space.

One last thing. The server recession has ended, but it remains to be seen when server shipments will get back to where they were before the GenAI boom started. With so many cores being crammed into a box and price competition for each core, perhaps this will take a long time indeed. Which again is great for customers.