Intel Earnings: Ugly News and Many Concerns

Key Morningstar Metrics for Intel

• Fair Value Estimate: $21.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Intel’s Earnings

Intel INTC reported disappointing second-quarter results while providing investors with a gloomy third-quarter forecast, suspending its dividend, and outlining a hefty cost-cutting program considering softer demand. Intel’s stock fell as much as 20% after hours, and we think the severe negative reaction was justified. We have cut our fair value estimate to $21 per share from $30 and do not see the selloff as a buying opportunity, as we are concerned about Intel’s competitive positioning. Even though Intel is doing the proper work to focus on leading-edge chip manufacturing, it appears that many of its customers in various end markets might be leaving Intel behind.

In the June quarter, revenue was $12.8 billion, up 1% sequentially, down 1% year over year, and below the midpoint of guidance of $12.5 billion-$13.5 billion. However, the horror came from the adjusted gross margin of only 38.7%, down 640 basis points sequentially and worse than guidance of 43.5%. Intel shifted production of its latest PC processors from a low-volume (but lower-cost) facility in Oregon to its high-volume (but much higher-cost, for now) plant in Ireland. Intel thinks this was the proper long-term shift, but we fear the firm rushed this processor (former codename Meteor Lake) to prime-time production in the face of intense competition for the artificial intelligence PC, perhaps speaking to the relative lack of competitiveness of prior-gen CPUs.

Intel expects September-quarter revenue of $13.0 billion, well below our prior forecast and FactSet consensus estimates of $14.4 billion. Adjusted gross margin should remain disappointing at 38%. Intel is seeing an inventory buildup for both PC CPUs and CPUs used in servers, the latter due to a capital expenditure mix shift at cloud companies toward AI servers. Given Intel’s high fixed costs and massive manufacturing transitions, any revenue shortfalls leave the firm nowhere to hide on the profitability front next quarter.