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Intel still has a lot to prove to Wall Street one year after Pat Gelsinger came home

MarketWatch logo MarketWatch 1/26/2022 Wallace Witkowski
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Intel Corp. had a rough 2021, and it looks like the chip maker will still face Wall Street criticism in 2022 for its ambitious capital investment plan and the success of competitors amid continuing delayed releases.


Video: Samsung's Q4 profit jumps on server chip demand (Reuters)

Intel is scheduled to report fourth-quarter earnings on Wednesday after the close of markets, a little more than a year after Intel first announced that Pat Gelsinger would be taking the helm as chief executive, and three quarters since Gelsinger first announced his plans for an aggressive build-out.

Read: Chips may be sold out for 2022 thanks to shortage, but investors are worried about the end of the party

Bernstein analyst Stacy Rasgon, who has an underperform rating on Intel and a $40 price target, said his year-ago preview titled “Don’t think it can’t get worse,” is “a theme that is seemingly playing out as we speak.”

Pulling no punches, Rasgon said he has remained negative on Intel “as they blow up their model in order to atone for 10 years of sin with margins coming down, capex ballooning, and free cash flow nonexistent even as they outline an aggressive road map fraught with risk, with outlandish growth targets in the long term and PC risk in the near term.”

Expect those declining profit margins to be front and center on Wednesday, after Gelsinger told analysts last quarter that under-pressure margins will remain “comfortably above 50%,” as it builds out its capacity to make silicon wafers. Excluding Intel’s divested memory business, the company reported gross margins of 57.8% for the third quarter, and forecast 53.5% for the fourth quarter. In comparison, Intel reported margins of 59.4% in the second quarter, and 58.4% both in the first quarter of 2021 and fourth quarter of 2020.

With silicon-wafer fabricators rushing to build out their manufacturing capacity to meet the COVID-sparked global chip shortage, Intel said in October it expects to spend $25 billion to $28 billion to build out its capacity in 2022, up from $20 billion in 2021. Intel also recently announced plans to spend more than $20 billion in Ohio to start building out what it claims will be the “one of the largest semiconductor manufacturing sites in the world” at a total investment of $100 billion over the next decade.

See also: Intel confirms plan to spend more than $20 billion to build chip ‘mega-site’ in Ohio

Intel’s quarterly results also come just a few weeks after the chip maker announced it poached Micron Technology Inc.’s Chief Financial Officer David Zinsner, and named Michelle Holthaus to head its largest business unit, client computing, better known as the PC business. Also, on Wednesday, Intel received some good news in that it won an appeal against a $1.2 billion E.U. antitrust fine.

What to look for

Earnings: Of the 37 analysts surveyed by FactSet, Intel on average is expected to post adjusted earnings of 90 cents a share, down from the $1.52 a share the company reported a year ago. Intel forecast 90 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of $1.10 a share.

Revenue: Wall Street expects revenue of $18.33 billion from Intel, according to 30 analysts polled by FactSet. That would be down from the $19.98 billion reported in the year-ago quarter. Intel predicted revenue of $18.3 billion. Estimize expects revenue of $18.59 billion.

Analysts surveyed by FactSet expect revenue from client computing to come in at $9.59 billion; data center revenue of $6.73 billion; nonvolatile memory solutions revenue of $1.06 billion; “Internet of Things,” or IoT, revenue of $1.06 billion; and Mobileye revenue of $355.1 million.

Stock movement: Don’t expect an automatic bounce if Intel beats expectations — Intel shares have declined following the company’s past six quarterly earnings reports in which earnings topped Wall Street estimates. Following the company’s last earnings report, the stock dropped nearly 12% after revenue missed expectations for the first time in 10 quarters, but more likely on concerns about how Intel’s aggressive capital expenditure plan would hurt profit margins. Shares are still more than 6% below the stock’s closing price before that drop.

Intel stock declined 3.3% overall in the December-ending quarter. Over the same period, the Dow Jones Industrial Average   — which counts Intel as a component — rose 7.4%, the S&P 500 index  advanced 10.7%, the tech-heavy Nasdaq Composite Index   gained 8.3%, and the PHLX Semiconductor Index   surged 21%.

What analysts are saying

Morgan Stanley analyst Joseph Moore, who has an equal-weight rating on Intel, said he doesn’t expect any big surprises following “last quarter’s fireworks,” adding that he expects Intel’s manufacturing headcount to go higher than expected.

As one example, Moore noted that “Thursday’s announcement of the Ohio fab came with 3,000 additional workers by 2025, roughly 3% of current headcount.”

“Longer term, the significant enthusiasm for capital spending could improve the process technology narrative, but makes it difficult for the stock to outperform longer term, in our opinion,” Moore said.

Citi Research analyst Christopher Danley, who has a neutral rating and a $58 price target, said he expects upside to the stock near-term leading up to Intel’s Investor Meeting on Feb. 17. Danley expects that Intel will fare well with “PC demand well above expectations due to the resurgent enterprise refresh,” and that “given the recent upside in notebook orders, we expect upside at Intel as well.”

However, Danley admits Intel “still a lot of wood to chop,” especially when PC demand normalizes, and that “considerable effort and focus still will be needed by Intel, especially in manufacturing, to catch up to its competitors.”

CES 2022: Intel focuses on autonomous driving, gaming and laptop chips

Those competitors include smaller rival Advanced Micro Devices Inc. which is scheduled to report its earnings on Feb. 1, and Nvidia Corp. which is scheduled to report earnings on Feb. 16, the day before Intel’s analyst day presentation.

Cowen analyst Matthew Ramsay, who has an outperform rating and a $60 price target, said in a note that “Intel remains controversial.”

“Long-term skepticism remains and share losses will continue until products ramp on the Intel 4 node (old 7nm), but with a new CFO, improving PC and server market outlooks, cash inflows from the U.S. govt., Mobileye on the horizon, and a February analyst day now reconfirmed, we are cautiously optimistic sentiment can continue

to gradually improve,” Ramsay said. “Still LOTS to prove.”

Opinion: Mobileye IPO will help raise much-needed cash for Intel — but will it be enough?

Susquehanna Financial analyst Christopher Rolland, who has a neutral rating and a $55 price target, said that while Intel’s PC chip release schedule appears on track, its new server chip code named “Sapphire Rapids” and new graphics processing unit are expected to get delayed.

“Numerous sources, including SemiAccurate, now expect delays for SR beyond 1Q22, with pushouts ranging from one to four quarters,” Rolland said. “Intel’s Arc could heat up GPU competition.”

Rolland was referring to Intel’s “Alchemist” Arc ray-tracing graphics chip announced at CES earlier in the month. Intel said it was shipping the GPU this quarter to original equipment manufacturers to be used in more than 50 mobile and desktop products.

“Intel’s upcoming DG2 series will add another alternative to the GPU market,” Rolland said. “While Intel had officially targeted a launch date of 1Q22, some rumors point to a delay to 2Q.”

See also: Analyst says Intel ‘is starting to execute on a coherent strategy’

B. of A. Securities analyst Vivek Arya, who has an underperform rating and a $55 price target, said the company “could remain a more stable force” and pointed to Intel’s seemingly never-ending loss of market share to AMD.

“AMD continues to remain a formidable competitor in both PCs/servers, and we wait to see execution on foundry/IDM strategies requiring a significant amount of capital investment,” Arya said.

“We continue to believe that INTC’s high ~90%, server share is unsustainable given the extremely competitive offerings from AMD, and we estimate AMD can gain 300-400bp of share annually over the next 3 years,” Arya noted.

Arya added that AMD has steadily gained share against Intel in the PC market as well, and expects AMD’s 2021 market share of value and units to grow from a respective 16% and 20% to a respective 17% and 23% by 2023.

Of the 40 analysts who cover Intel, 10 have a buy rating on the stock, 21 have a hold rating, and nine have a sell rating, along with an average target price of $54.87, according to FactSet data.

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