Intel's Record Q4 Results; No Update on Outsourcing

Intel INTC reported fourth-quarter results that significantly exceeded its guidance, primarily due to stronger than expected PC demand related to the ongoing work- and learn-from-home trends stemming from COVID-19. Due to the impending CEO transition from Bob Swan to Pat Gelsinger (effective Feb. 15), management did not elaborate on its outsourcing plans or provide full-year guidance. We view this decision as prudent, as it will allow Gelsinger some time to assess the current state of affairs for Intel’s 7-nanometer process technology before the firm’s April earnings call. One key point offered by Gelsinger was that he expects the majority of products sold by Intel in 2023 to still be manufactured internally. Shares of wide-moat Intel were down nearly 5% after hours, which we attribute to the aforementioned lack of clarity on outsourcing. That said, shares are up 41% from late October lows and are trading at a more modest discount to our unchanged fair value estimate of $65 per share.

Fourth-quarter revenue was down 1% year over year to $20 billion, though it was $2.6 billion above guidance. The client computing group, or CCG, was the chief driver of the outperformance as notebook volume grew 30% year over year. We expect PC sales to remain above seasonal levels for at least the first half of 2021. Data center group, or DCG, sales were down 16% year over year due to a combination of weaker enterprise and government spending, cloud digestion, and competition from AMD that has pressured Intel’s prices. Specifically, fourth-quarter ASPs for Intel’s DCG platform were down 12% year over year. While we anticipate continued pricing pressure throughout 2021, Intel’s first 10-nm server product (Ice Lake) is finally shipping and should help mitigate Intel’s share loss in server CPUs, in our view. For 2020, total sales grew 8% year over year, with CCG and DCG sales up 8% and 11%, respectively.

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