Intel Tries to Salvage Messy Arrow Lake Launch

The PC market has struggled to bounce back following a post-pandemic plunge in demand. Global PC shipments dipped slightly in the third quarter on a year-over-year basis, and forecasts put shipment growth for 2025 in the single-digit percentage range. The introduction of artificial intelligence (AI) PCs, which have enough dedicated AI processing power to run some AI workloads directly, has so far failed to capture consumers' attention.

A tough PC market means that Intel (NASDAQ: INTC) can't rely on rising demand to drive sales growth in its PC segment. Instead, the company must put out products that beat out alternatives from AMD and Qualcomm.

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In the laptop market, Intel delivered impressive battery life and performance with its Lunar Lake chips. In the desktop market, the company fumbled with Arrow Lake.

What went wrong

In multiple areas, Intel's Arrow Lake chips excelled. The company opted to outsource most manufacturing to TSMC, allowing it to tap into an advanced process node and greatly improve energy efficiency, compared to its power-hungry Raptor Lake chips. Arrow Lake also performed well in productivity workloads, producing a solid improvement in single-threaded performance while blasting past the competition in various multithreaded benchmarks.

Where Arrow Lake fell short was gaming. Performance across different games was erratic, and in some cases, Arrow Lake chips performed far worse than their predecessors and comparably priced chips from AMD.

Arrow Lake was never meant to be a gaming powerhouse, as Intel telegraphed that gaming performance would be approximately unchanged from Raptor Lake. But reviewers found significant performance degradations in some tests.

While gaming is only a portion of the desktop PC market, the Arrow Lake launch was a black eye for Intel.

Making it right

Many of the gaming performance issues experienced with Arrow Lake are fixable, and Intel is in the process of rolling out those fixes now. In an update earlier this month, Intel laid out five distinct problems that were each hurting performance. Four of the five issues have already been resolved through Windows updates and updated software, and the last issue is slated to be resolved in January.

In some cases, the performance improvements should be dramatic. One of the issues caused performance degradations between 6% and 30%, depending on the workload, while the other issues produced degradations as high as 14%. There likely won't be meaningful improvements in workloads that already performed well with Arrow Lake, but gaming performance should get a nice boost.

Intel needs to grow its PC business again

Intel is in the middle of making massive manufacturing investments as it looks to become a leading semiconductor foundry. The product business has partly been funding these efforts, so recent slumps in sales and profits for both the PC and data center segments have been problematic. Client computing revenue, which encompasses PC-centric products, was down 7% year over year in Intel's latest quarter.

With the recent launch of its second-generation Arc graphics cards, which received exceedingly positive reviews, Intel is in a great position to capture graphics card market share. Having a lineup of desktop CPUs that are appealing to gamers will create some cross-selling opportunities as system builders pair Intel CPUs and GPUs, and as DIYers opt for all-Intel PCs.

In 2025, Intel is planning to launch PC CPUs built on its upcoming Intel 18A manufacturing process. That could give the company an important edge, assuming Intel 18A delivers on its potential and is ready for high-volume production on time.

Until then, the company needs to convince customers that Arrow Lake is a compelling option, rather than a mixed bag. With its first round of fixes, Intel is on its way to doing exactly that.

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Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.