• The final nail in Intel’s coffin…
  • This private AI company is a hot commodity…
  • Discord walked away from the deal…

Dear Reader,

If we needed any more evidence regarding the degree to which the pandemic impacted consumer behavior, we need not look any further than Alphabet – the parent company of Google.

Alphabet reported revenues of $55.3 billion, up 34% year on year. What was more impressive, though, is that it brought in $17.9 billion of net profit, up an incredible 162% compared to the same quarter last year.

What happened? The company basically kept its sales and marketing costs flat over the last four quarters while its business grew dramatically. That drove the impressive spike in net income.

As we know, almost all of Alphabet’s revenues come from selling advertisers access to our data. This is what drives the company’s ever-increasing advertising revenues and incredible gross margins.

And during the pandemic, consumers have been spending more time than ever in front of their desktops, laptops, and, of course, smartphones.

This has been a boon to the digital advertising industry – in particular, Alphabet (Google) and Facebook.

But that’s not all.

Alphabet’s cloud service business also grew dramatically. It generated a comparatively small $4 billion in revenue, which jumped 46% year on year.

Unlike the advertising business, its cloud business is not profitable. Alphabet lost almost $1 billion in the quarter as it continues to scramble in a desperate attempt to catch up to Amazon Web Services (AWS). Good luck.

The growth in the cloud service division was still telling, though.

The reality is that enterprise customers around the world looked for ways to reduce their operational expenses during the pandemic while their own businesses suffered. Migrating information technology (IT) infrastructure from an on-premise architecture to cloud-hosted services is a great way to do that.

The ironic part is that these clients save money by making the move, which results in Alphabet losing money on the deal.

But we won’t feel bad for Alphabet. Its overall business is gushing free cash flow, and it can certainly afford to grow its cloud services unit at a loss.

I’ll be watching Alphabet’s quarterly results closely over the next several quarters. These will give us a gauge on how the economy is functioning in a post-pandemic, post-vaccine world.

If things return back to normal in terms of our work/life routines, we should see Alphabet’s growth return to more “normal” levels. If we continue to see elevated growth, it will suggest a continuation of working and learning from home and a sustainable shift in our work habits.

The one thing we can be sure of, however, is the continued shift to cloud services. This has been a well-defined trend over the last decade. Yet many organizations continued to hold on to the old way of doing things.

However, the pandemic changed that. And it was out of necessity.

Corporations large and small and public sector organizations needed to have a more dynamic and accessible IT infrastructure. They no longer could count on having an IT team working on site managing an in-house data center around the clock.

Cloud services solved that problem. The cloud enables instantly scalable compute and storage for just about any application we can imagine.

Price and performance also continue to improve with each and every quarter that passes. That means this trend simply can’t be stopped.

Now let’s turn to today’s insights…

NVIDIA’s latest move is bad news for Intel…

We have documented Intel’s decline on a number of occasions in The Bleeding Edge.

But we have always acknowledged that the legacy incumbent’s remaining strength is in the data center space. Revenues from Intel’s x86 microprocessors for data center servers have been growing. This is the one part of Intel’s business that has continued to do well.

The only other competitor in this arena is AMD, which has gradually made inroads. Despite this, Intel still commands over 90% of the market.

Year after year, AMD chips away at Intel’s market share, but it takes time to claw away Intel’s multi-decade near monopoly on computer server microprocessors.

But that’s all about to change.

NVIDIA just unveiled its first ever server microprocessor product for data centers. This is a direct shot at Intel. NVIDIA is entering the data center market as a new competitor.

And get this – NVIDIA claims its new microprocessors will be 10 times faster than what’s currently in use. They will enable radically better performance, which is monumental when we’re dealing with data centers the size of a football field. The performance gains add up fast.

This could very well spell doom for Intel. And the market senses it. Since this announcement, shares of NVIDIA (NVDA) are up 8%, while Intel (INTC) is down 14%.

The good news for Intel is that NVIDIA’s new microprocessors won’t be ready for volume production until 2023. Intel can enjoy a few more years of dominance.

But I would expect the company’s market share to decline rapidly once NVIDIA’s product is available.

And between now and then, AMD will continue to win market share against Intel. I wouldn’t be surprised to see AMD’s server CPUs achieve 15% market share by the time NVIDIA finally reaches the market.

So history very well may mark this event as the final nail in the coffin for Intel.

Given that it is sitting on over $22 billion in cash and short-term investments, the company isn’t going out of business any time soon.

But the days of Intel dominating any given market are quickly coming to an end. I would advise investors to steer clear of the stock.

This early stage AI semiconductor company is on the rise…

Speaking of semiconductors, SambaNova Systems just had a massive early stage funding round that caught my eye.

Longtime readers may remember this company. We talked about SambaNova after its $250 million Series C round last year.

To bring new readers up to speed, SambaNova is focused on artificial intelligence (AI) and machine learning (ML). It develops application-specific chips to optimize AI/ML functions, competing directly with NVIDIA in the process.

What makes SambaNova unique is its holistic approach. The company also develops software systems to run on top of its hardware.

And its technology is now being used by the Argonne National Laboratory, the Los Alamos National Laboratory, and the Department of Energy.

This has made SambaNova a hot commodity in the private markets. The company just raised an impressive $676 million in its Series D round. That puts its valuation at $5 billion.

And we should remember that this company just got started in 2017. It’s gone from zero to $5 billion in about four years. That doesn’t happen often.

What’s more, SambaNova revealed a new service alongside its Series D raise.

The company is rolling out an on-demand, cloud-based platform that will allow enterprise customers to use its AI/ML technology. This is very similar to what Amazon does with Amazon Web Services.

So SambaNova isn’t content to simply sell its AI semiconductors into cloud service providers like Google Cloud and AWS. It’s going to provide a cloud-based service as well. That’s an interesting move that almost certainly contributed to its latest $5 billion valuation.

At this point, SambaNova needs to be high on our radar. I wouldn’t be surprised to see the company go public within the next 12 months or so.

There’s also a chance that it will get acquired at these levels. Any interested acquirers will only end up paying a much higher price if they wait.

Either way, we need to watch this one closely. SambaNova’s technology is impressive, and the AI/ML space is one of the hottest growth markets today.

Discord just turned its back on Microsoft’s acquisition attempt…

We’ll wrap up today with an update on Discord.

Earlier this month, we talked about how Microsoft was engaged in discussions to acquire the early stage messaging and digital distribution company.

It’s another case of Microsoft trying to buy revenue. The terms of the deal would have required Discord to migrate its software platform from Google Cloud to Microsoft Azure – Microsoft’s cloud services division.

The rumors floating around suggested that Microsoft was looking at a deal in the $10–12 billion range. That’s no small sum for a private company that’s largely been operating in a niche space.

If we remember, Discord is most popular in the gaming community and among those in the blockchain industry.

Thankfully, Discord decided to walk away from the deal. I suspect management realized that Discord would be worth a lot more than that in the public markets.

After all, Discord now has 140 million monthly users on its platform, and it’s still growing. Discord is now behind Twitter, which reported about 353 million monthly active users in the fourth quarter of 2020.

Plus, the market environment has been kind to gaming companies of late.

Last year, Unity Software – a company that produces one of the top gaming engines on the market – went public at a $13.7 billion valuation. The company has since traded up to a $27.3 billion valuation in the public markets.

And just last month, Roblox – one of the most popular online games out there – did a direct listing at a $41.9 billion valuation.

So the gaming industry is hot right now, which would make Discord an attractive investment. It’s a great product with a fantastic user interface (UI). I’m sure that’s why management chose to keep the company independent, which I am thrilled to see.

Let’s continue to watch Discord going forward.

There may be a path to a successful initial public offering (IPO) in the near future, and there might even be a direct listing given the size of its existing user base. And this company will make a great investment target at the right valuation.


Jeff Brown
Editor, The Bleeding Edge

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