The semiconductor industry has traditionally been subject to booms and busts, and we are currently in the midst of a year-long bust, prompted by the U.S.-China trade war. Nevertheless, the future economy will be based on data, processing, and artificial intelligence. Chip stocks have seen a bit of a recovery of late, but most are still below the all-time highs set last year, so investors are looking for clues regarding the timing of the next upcycle.
Two large, broad-based semiconductor firms, Taiwan Semiconductor (NYSE:TSM) and Texas Instruments (NASDAQ:TXN), recently reported better-than-feared results and guided for strong sequential growth going into the second half of the year. In another hopeful turn for semiconductors, Intel (NASDAQ:INTC) added a third name to the list last week.
Here are the ins and outs of Intel's recent quarter, and what it could mean for computing and memory industry stocks for the second half of the year.
Not great expectations going in
As was the case with the other two aforementioned stocks, Intel had relatively low expectations going into the quarter. In fact, the company's revenue actually declined 2.7% to $16.5 billion. But that figure still absolutely trounced analysts' expectations -- by over $800 million.
Before investors get too excited, Intel management did say the quarter's beat was partly due to customers getting nervous about tariffs and pulling some demand into the second quarter. However, management only pegged that figure at $400 million, with the additional $400 million-plus being the "real" beat, so to speak. In response, Intel raised its full-year revenue forecast by $500 million over its April guidance to $69.5 billion.
The strength was relatively broad across Intel's portfolio. The core PC-centric computing group (which accounts for just over half of revenue) was actually up 1% in the quarter, as Intel had been hampered by production constraints for its PC chips late last year. So the current PC strength could merely be seen as satisfying the pent-up demand that couldn't be realized late last year.
The remaining data-centric group (DCG), consisting of data center, Internet of Things, programmable chips, and memory chips, cumulatively declined by 7%. The IoT group is growing strongly, offset by significant declines in data center, programmable chips, and memory.
Semiconductor investors are probably looking closely at Intel's DCG, as that segment was the big driver of chip growth in 2017 and 2018. So, while the new strength in PC is nice, most chip investors are likely focusing on a potential data center comeback.
Management expects stronger data center growth in the second half of the year
On the conference call with analysts, Intel reiterated full-year guidance that called for the DCG to be down "in the mid single-digits." That may sound pretty bearish, but it's actually quite the opposite: The first half of the year already saw that segment decline by an even greater amount, with the DCG down 6% in the first quarter and 10% in the second.
That led JPMorgan & Chase's Harlan Sur to confirm that Intel's guidance implied about 20% sequential growth in the data center segment from the first half of 2019 to the second half of 2019. CEO Bob Swan replied:
I would say we're still roughly in that ballpark. We haven't really changed our view of the full year, maybe a little bit that slipped into the first half relative to our original second half expectations on the pull-ins, even though it was more of an impact on the PC side that we saw a little bit of that in DCG. We're looking to a strong second half for DCG.
Cautiously more optimistic on Intel
Intel's cautiously optimistic outlook for the second half mirrors those of rivals Taiwan Semi and Texas Instruments, meaning that chips should still see sequential growth in the next two quarters, despite the trade war overhang.
Beyond the macro-economic environment, Intel also has a few issues from a competitive standpoint, such as its delayed ramp of 10nm chips and the ascension of rival Advanced Micro Devices. Intel management sounded a bit more upbeat on 10nm, with its Ice Lake chip production currently ramping up in time for the holiday season, the 10nm Agilex FPGA chips set for early next year, and the Snow Ridge 10nm system-on-chip for 5G communications ready early next year as well.
Taiwan Semi had pointed to 5G as a key driver of second-half growth in its recent earnings report, so perhaps the 5G buildout this year can boost chips stocks in 2019 and 2020, as the big cloud data center buildout did in 2018.