Public Markets Venture

Intel Beats Earnings Expectations, But VCs Pull Back From Silicon

Semiconductor manufacturer Intel announced its financial performance for Q4 2017 on a call with investors after market close. Intel’s per-share earnings came in at $1.08, beating analyst expectations of $0.87 cents. Shares are up in after-hours trading.

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On the call, Intel CEO Brian Krzanich said that Q4 was the best quarter of the best year in company history.

However, despite it being Intel’s best quarter, Krzanich has been under fire after revelations that he had sold some $24 million worth of Intel shares after being briefed about security flaws affecting Intel chips. According to SEC filings from November 2017, Krzanich sold 644,135 shares of Intel valued at a weighted average of $44.05.

These vulnerabilities were announced together on January 3, 2018. The separate but loosely-related flaws, called Spectre and Meltdown, leave CPUs made by Intel, AMD, ARM and others vulnerable to memory leaks and subsequent data theft under a certain set of conditions. Many news outlets reported that security researchers from Google’s Project Zero team informed Intel and AMD about Spectre in June 2017 and about Meltdown slightly later.

Chipmakers and device manufacturers like Apple and Microsoft have (mostly) patched these hardware vulnerabilities with software updates, which may result in degraded performance in exchange for added security. The only long-term fix to these problems are changes to CPU architecture at the silicon level. Krzanich said on the call that new products with fixes to these problems will be available in the second half of 2018.

Despite these issues, public markets have been rather kind to Intel, AMD, Nvidia, and other hardware manufacturers as advancements in machine learning, virtual reality, computer vision, blockchain, automation, and other technical fields continue to increase demand for newer, more capable hardware.

Private-market investors, on the other hand, have been seemingly less interested in funding scrappy upstarts. Based on an analysis of venture rounds (excluding PE) raised by US-based companies in Crunchbase’s categories for semiconductors, flash storage, GPUs, and other related fields, we find the possibility of general declines in the market.

It’s important to note that this data is subject to reporting delays, with earliest-stage deals taking the longest to be reported. So, in reality, the market is most likely slightly better than what’s reflected here. However, Crunchbase News has documented a two-year downtrend in startup investing based on projections which account for those reporting delays.

It’s possible that the driving force behind an apparent decline in venture investment in chipmakers is similar to what’s weighing on the startup market as a whole. Big tech companies are increasingly capable of designing and manufacturing their own hardware.

In mid-2017, Apple hired Esin Terzioglu, who previously worked at Qualcomm for eight years, to lead its wireless system on a chip (“SoC”) team. And although TSMC has reportedly agreed to make all of the as yet unreleased A12 chips in 2018, sources say that Apple is “set to replace partially, or around half of its power management chips to go into iPhones by itself starting [in 2018].”

Google has also been on quite the hiring spree. The search engine giant has poached executives from Qualcomm and Apple to help build out a new line of smartphones and sensors.

And as for these “frontier” technologies like AI, big chipmakers are diving in via M&A. Intel itself is responsible for some very large deals. Intel’s $15.3 billion acquisition of Mobileye, which makes computer vision systems for automotive applications, was one of the largest acquisitions of 2017. A comparatively modest $400 million buyout of Movidius, a semiconductor manufacturer also specializing in computer vision, and a $350 million acquisition of Nervana—both deals from 2016—helped Intel cement its position in the businesses that made Q4 2017 look so good for the company.

Despite increasingly capable competition, it’s unlikely that venture investors will pull back entirely from this market any time soon. After all, that’s what made Silicon Valley what it is today.

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