Strong PC Demand Bolsters Intel

Intel INTC reported first quarter results that exceeded its guidance, primarily due to stronger-than-expected laptop demand related to the ongoing work- and learning-from-home trends stemming from COVID-19. In contrast, data center group, or DCG, revenue and operating margins fell sharply. While management was adamant the lower DCG operating income was driven by lower sales, 10-nanometer ramp, and increased R&D investment, we think the biggest driver was renewed competition from AMD. We remain optimistic on Intel’s IDM 2.0 strategy to get its manufacturing back on track and develop a more meaningful foundry strategy. Nonetheless, we expect the next few quarters to be challenging, with 2021 sales flat year over year and gross margins down at least 150 basis points. We are maintaining our $65 fair value estimate for wide-moat Intel and see shares as fairly valued.

First quarter revenue was down 1% year over year to $19.7 billion, though it was about $1.1 billion above guidance. The client computing group, or CCG, was the main area of outperformance as notebook volume grew 54% year over year. We expect PC sales to remain above seasonal levels for the next few quarters. DCG sales fell 20% year over year due to a combination of weaker enterprise and government spending, cloud digestion, and competition from AMD. For the quarter, DCG platform ASPs were down 14% year over year. While we expect AMD to continue to gain market share, Intel’s newly launched 10-nm Ice Lake server CPU family and 2022 Sapphire Rapids product line should help Intel limit material share loss in server CPUs.

Management expects second quarter sales to be $18.9 billion, which would be down 4%. When factoring in lower modem and PC CPU sales to Apple, we think this is a reasonable outlook. Specifically, we think continued PC strength is being offset by weaker DCG sales, though we think the DCG revenue trajectory will improve over the course of 2021.

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