Microsoft develops its own processors for its data centers and PCs

Microsoft is partnering with Arm to develop its own processors for Azure cloud data centers and its Surface PC line, media reported. Amazon and Apple are already on the road to building their own chips. The news was mirrored by a drop in Intel and AMD shares.

Microsoft (MSFT) is working on developing its own microprocessors for servers used in data centers for the Azure cloud service, and possibly for Surface personal computers, using technology from the chip manufacturer Arm. Bloomberg reported this on Friday, citing anonymous sources.

Microsoft shares, which are up 41% year-to-date, were upgraded Monday and their target price was upgraded by a Citigroup analyst from neutral to buy and from $ 229 to $ 272. Microsoft shares were up 1.83% at the close on Monday.

Since Microsoft uses Intel chips (INTC) for most of its laptops and Surface PCs, as well as its data centers, building Microsoft’s own chips could have a huge impact on Intel’s revenues and profits in the long run.

Intel shares were hit hard this year, down 22.5% as the company faced production delays that its rival Advanced Micro Devices (AMD) took advantage of, taking away some of Intel’s market share.

In addition, Intel shares fell on news of Apple’s (AAPL) release of new Mac PCs (MacBook Air, 13-inch MacBook Pro and Mac Mini) with their own M1 processors instead of Intel chips.

According to Apple, the M1 chips are based on ARM technology, as opposed to the x86 architecture that Intel chips use. In addition, Apple’s Asian M1 partner TSMC used 5nm transistors, a technology Intel lacks. Apple has announced the M1 as having higher performance and lower power consumption compared to Intel’s alternatives.

It looks like Microsoft wants to follow the same path. The company is already using Qualcomm’s Arm-based chips (QCOM) for several models of its Surface PC line.

Microsoft’s hiring of microprocessor engineers in recent years, including staff with experience in large semiconductor companies such as Intel, AMD, and NVIDIA (NVDA), as well as engineers that became unnecessary at QUALCOMM when the company left the server chip market. confirms these plans.

The plans are also in line with earlier statements from Microsoft.

“Since silicon is a fundamental building block for technology, we continue to invest in our own capabilities in areas such as design, manufacturing and tooling, and forge and strengthen partnerships with a wide range of chip suppliers,” said Microsoft spokesman Frank Shaw.

Microsoft’s main competitor in the cloud computing market, Amazon (AMZN), is also looking to improve the performance and lower costs of its large data centers with a more advanced processor. In 2019, cloud-based Amazon Web Services began using its own Graviton2 processors, also based on Arm.

This trend suggests that the largest clients of semiconductor companies – PC makers and owners of large data centers have enough financial resources to develop their own microcircuits and this could “change the balance of power in the industry.”

Amazon, Apple, Microsoft or Google (GOOG, GOOGL) may hire contract chip manufacturers like Taiwan Semiconductor Manufacturing (TSMC), among others, to actually make custom chips.

These potential threats seem very real, which is why shares of Intel and AMD fell sharply on Friday by 6.3% and 0.9%, respectively. Intel shares closed 2.3% lower on Monday, while AMD shares fell 2.8%.

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