Intel Continues to Enjoy Robust PC Demand in Q2

Intel reported second-quarter results that exceeded its guidance, primarily due to stronger-than-expected laptop demand. The firm has been experiencing a renaissance in the PC market, as COVID-19 has increased PC density (PCs per household) as more people work and learn from home. CEO Pat Gelsinger expects the PC addressable market to maintain growth beyond 2022, citing an estimated 400 million PCs over 4 years old that could be due for refresh. More importantly, Intel’s data center group, or DCG, continues to face major headwinds. Management cited competition, increased costs associated with the 10-nanometer ramp, and increased R&D spending as key drivers of the DCG operating income decline (down 37% year over year). We suspect the biggest challenge remains renewed competition from AMD that is likely pressuring Intel’s DCG prices. While we remain optimistic on Intel’s IDM 2.0 strategy to get its manufacturing back on track and develop a more substantial foundry offering, we expect the next few quarters to be challenging.

We are maintaining our $65 fair value estimate for wide-moat Intel and see the shares as modestly undervalued.

Second-quarter revenue was down 1% year over year to $19.6 billion, though it was about $700 million above guidance. The client computing group, or CCG, was the main area of outperformance as notebook volume grew 40% year over year. We expect PC sales to remain above seasonal levels for the next few quarters as demand outpaces supply. Management noted the PC supply chain is still facing component shortages that are expected to persist for at least a few more quarters and lead to lower sequential CCG sales for Intel in the third quarter. DCG sales fell 9% year over year due to a challenging comparison and competition from AMD. Positively, enterprise and government spending improved 6% year over year following three consecutive quarters of declines. As economies continue to reopen, we expect enterprise spending to improve in the coming quarters.

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