Investors weren’t thrilled with chip-giant Intel‘s (INTC -1.75%) fourth-quarter report. While the company beat expectations across the board, its outlook for the first quarter was disappointing. Intel CEO Pat Gelsinger called the various headwinds facing the company in the first quarter temporary, but the market punished the stock, regardless.
While Intel’s near-term fortunes are tied to the PC and server CPU markets, the company is on track to eventually generate billions of dollars annually from its artificial intelligence (AI) accelerator chips. As the year goes on, Intel expects revenue from this emerging business to accelerate.
Soaring demand for AI chips
Thanks to its 2019 acquisition of Habana Labs, Intel is already a player in the booming market for AI accelerators. The company’s Gaudi line of chips, purpose-built for AI training and inference workloads, is a cost-effective alternative to high-powered GPUs from market leader Nvidia.
In July of 2023, Intel disclosed that its AI accelerator pipeline had reached $1 billion after growing by a factor of six in a single quarter. At the end of 2023, this figure exceeded $2 billion.
This doesn’t mean that Intel is generating this much revenue from its AI accelerators right now. Instead, the company expects these commitments from customers to convert to revenue over time.
Gaudi 2 is the current-generation AI chip driving much of this growth for Intel. While it’s nearly as powerful as Nvidia’s top-tier product, it does win in certain scenarios and provides solid performance per dollar. In a recent blog post by DataBricks, the data company found in its testing that Gaudi 2 was second best in performance per chip and the winner in performance per dollar using on-demand pricing from a cloud AI provider.
Intel plans to launch Gaudi 3 sometime this year, which has the potential to propel the AI accelerator business to new heights. The company is promising a quadrupling of processing power and a doubling of networking bandwidth. Intel said that it recently increased the supply of both Gaudi 2 and Gaudi 3 to accommodate growing demand.
After Gaudi 3, Intel plans to merge its AI-focused GPU and Gaudi product lines into Falcon Shores, a next-generation data center GPU. Falcon Shores is expected to launch in 2025.
An enormous market opportunity
When Intel acquired Habana Labs in 2019, the company predicted that the market for AI chips would exceed $25 billion by 2024. AI chips encompass more than just dedicated accelerators. Intel’s latest server CPUs contain dedicated AI hardware, as does the company’s Meteor Lake laptop chips.
Intel’s estimate turned out to be overly pessimistic. Gartner puts the AI chip market at $67 billion in 2024 and $119 billion by 2027. Other estimates put the market at nearly $400 billion by 2032. While estimates aren’t fact, there’s no indication that demand for AI chips will slow down anytime soon.
Nvidia currently dominates the AI accelerator market, and Advanced Micro Devices is making a stand with its latest Instinct AI chips. Both companies represent stiff competition for Intel, but the market is expected to become so large that there will be room for multiple winners. Even if Intel finds itself in second or third place in the long run, AI accelerators could eventually generate many billions of dollars in revenue annually for the chip giant.
Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.