Intel shares collapsed in early Friday trading, taking the stock back to levels last seen in the early 2000s, after the chipmaker posted second-quarter earnings and a near-term profit forecast that raises huge questions for the fate of its turnaround under Chief Executive Pat Gelsinger.
Intel (INTC) wants to scale its business across the artificial-intelligence spectrum by making chips that power next-generation laptops as well as those that support processors for client-based servers.
It’s also building and expanding a contract chip-foundry business tied to investments from President Joe Biden’s Chips Act legislation.
Managing both, however, has proved incredibly difficult, and the stock has fallen nearly 40% so far this year as profit was weighed down by bloated inventories and its foundry division was hammered by billions in losses tied in part to outdated production techniques.
The group’s Q2 report did little to change that perspective as adjusted profit for the three months ended in June came in at 2 cents a share, well shy of Wall Street’s 10-cent forecast. Revenue fell 1.15% to $12.8 billion.
Intel CEO Pat Gelsinger called the group’s restructuring moves ‘some of the most consequential changes in our company’s history.’
Looking into the current quarter, Intel sees revenue in the region of $12.5 billion to $13.5 billion, again shy of the LSEG forecast of $14.35 billion, and it unveiled plans to reduce its global headcount by 15% — more than 15,000 people — and suspend its quarterly dividend.
Intel’s investment drive
“We’re building two world-class companies,” Gelsinger told investors on a conference call late Thursday. “The forensics that we’ve done this year, this clean-sheet exercise as we could describe it, is building a world-class Intel foundry and building a world-class Intel products group.”
“And we believe that with the new products, a better financial position that we’ve done for a more efficient operation, that we see the long-term opportunity for significant value creation for all of our stakeholders,” he added.
Analysts are far more skeptical, with a host of Wall Street banks slashing their ratings and price targets on the group following what HSBC’s Frank Lee called a “head-scratching margin miss and equally disappointing guidance.”
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Lee, who lowered his price target on Intel by $15.20 to $19.80 a share, said Intel remains bullish on both its product road map and its long-term strategy in the foundry business model.
“However, any guidance or focus on cost reductions and [capital-spending] cuts will be overshadowed by lack of investor confidence, which will take some time to restore,” he argued.
Intel said its job cuts and overall cost cutting would lower its capital-spending and operating expenses by around $10 billion next year.
In a memo to employees Gelsinger called the moves “some of the most consequential changes in our company’s history,” but analysts still wonder whether the effort will be enough to widen its profit margins in a fiercely competitive market.
Intel’s restructuring plans
“The good news is that post-restructuring, the top line will not need to accelerate too meaningfully to offer strong operating leverage and return to positive free cash flows,” said Cantor Fitzgerald analyst C.J. Muse, who lowered his price target by $13 to $27 a share.
“The bad news is that Intel remains a ‘show me’ story as it relates to internal success on [Intel’s power delivery architecture] as well as the company’s ability to truly become a leading-edge foundry,” he added.
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Raymond James analyst Srini Pajjuri, who lowered his rating on Intel to market perform (effectively neutral) from outperform following last night’s report, said that while the cost-cutting should reduce cash burn, he doesn’t see revenue improving over the near term.
“As such, we expect profitability to remain under pressure and are moving to the sidelines despite the attractive valuation and our view that an eventual foundry separation could unlock significant value,” Pajjuri said.
Benchmark analyst Cody Acree, meanwhile, thinks the weaker-than-expected revenue outlook is likely the result of Intel losing share to rival Advanced Micro Devices (AMD) in both the data-center and client-computing markets.
Intel’s new product lineup
Intel has been looking to address that loss by launching three updated products that could undercut its rivals and extend its leadership in the markets for AI-powered personal computers.
Xenon, a new data-center processor that Intel says will require fewer racks and less power while delivering better performance, hit the market in June, with a higher-end version expected in the third quarter.
International Data Corp. figures suggest server spending could reach $33 billion this year alone as companies ramp their AI-investment plans.
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Intel also launched its Lunar Lake chip for AI computing, which it says will start shipping in the third quarter, as it looks to build on the expected demand for AI-powered laptops.
The group further revealed pricing data for the Gaudi family of AI accelerators, which will be built into Xenon processors and sharply undercut the cost of Nvidia’s (NVDA) benchmark H100 chips.
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Acree, who cut his rating on Intel to hold from buy, said Intel’s “positive points in the June quarter were centered on its somewhat limited volume opportunities in the AI PC market and the potential for AI to drive an eventual upgrade cycle.”
“While we hesitate to downgrade our rating on the company’s shares, particularly after so much negativity is already reflected in its premarket trading, we struggle to identify a tangible positive catalyst,” he added.
Intel shares were marked 22% lower in premarket trading to indicate an opening bell price of $22.70 each, a move that would mark the biggest single-day decline in 24 years.
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