Intel’s Impressive Q2 Overshadowed by 7-Nanometer Delay

Intel INTC reported second-quarter results that handily exceeded its guidance as laptop, server, and memory sales enjoyed double-digit growth driven by the working- and learning-from-home trends caused by the coronavirus. Management increased its revenue outlook by $1.5 billion for 2020, mostly stemming from the first half outperformance and a faster ramp of 10-nanometer products. We expect Intel will face increasing competition from AMD as well as moderation in cloud and PC demand in the second half of 2020. Yet this strong performance was overshadowed by Intel’s disclosure that its 7-nm-based CPU products will be delayed by about six months, as the yields are trending about 12 months behind internal targets. To reconcile the six-month delta, CEO Bob Swan highlighted Intel’s contingency plans, which include die disaggregation (making different parts of a chip on different manufacturing technologies) and leveraging external foundries such as TSMC.

We are maintaining our $70 fair value estimate, as stronger near-term results and lower capital expenditure assumptions for 2020 are offset by lower long-term PC and data center CPU estimates (due to Apple shifting to internal chips for its Mac PCs and greater competition from AMD). Shares were down more than 10% during after-hours trading and are now in 4-star territory. Although we are reaffirming our wide-moat rating for now, our negative moat trend rating is seemingly validated by the 7-nm delay and possibility of Intel using foundries to make more of its chips (older Altera and certain Mobileye chips are currently made at TSMC). Despite competitive and manufacturing headwinds, we remain positive on Intel’s scale in cloud computing and opportunities in automotive, 5G, and artificial intelligence, and we think long-term investors should find current levels attractive.

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