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Intel Investors Should Expect Dramatic Ups and Downs in 2020

By Anders Bylund - Jan 25, 2020 at 7:07AM

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The microchip giant crushed analyst expectations in the fourth quarter, set the bar sky-high for the first quarter, and explained that the full year might be a rocky ride.

Intel (INTC 3.32%) reported fourth-quarter results on Thursday evening. The chipmaker's business is booming across nearly all of its reporting segments and investors embraced the results by driving share prices as much as 9.4% higher in Friday's trading session.

Intel's fourth-quarter results by the numbers

Metric

Q4 2019

Q4 2018

Change

Analyst Consensus

Revenue

$20.2 billion

$18.7 billion

8%

$19.2 billion

GAAP net income

$6.9 billion

$5.2 billion

33%

N/A

Adjusted earnings per share (diluted)

$1.52

$1.28

19%

$1.25

Data source: Intel. GAAP = generally accepted accounting principles.

Digging into the numbers

Four of Intel's six business units posted double-digit percentage growth in their Q4 sales compared to the year-ago quarter. Mobileye led the way with a 31% sales jump to $240 million followed by the data center group's revenue rising 19% to $7.2 billion. The outlier at the bottom of the heap was Intel's programmable semiconductors group, where sales fell 17% to $505 million.

The results also compared favorably to Intel's guidance, which pointed to adjusted fourth-quarter earnings near $1.24 per share on revenue in the neighborhood of $19.2 billion.

"Several years ago, we began a transformation to reposition the company to take advantage of the data revolution that is reshaping computing," CEO Bob Swan said in the earnings call. "We are accelerating growth by expanding the capabilities of our workload-optimized platforms and playing a larger role in our customers' success. Demand for our Intel Xeon Scalable processors is very strong as customers continue to make Xeon the foundation for their AI-infused data center workloads."

What's next for Intel?

The good news didn't stop with the strong fourth-quarter results. Intel also set guidance targets far above current analyst projections, both for the next quarter and for full-year fiscal 2020.

  • For the first quarter, Intel guided adjusted earnings to approximately $1.30 per share on revenue near $19 billion. That would amount to 46% year-over-year earnings growth and 18% stronger sales. Your average analyst would currently have settled for earnings of roughly $1.04 per share on top-line sales in the neighborhood of $17.2 billion.
  • For the full year, adjusted earnings should rise 2% to $73.5 billion. Adjusted earnings are expected to grow by 9% to $5.00 per share. Here, the analyst consensus stopped at earnings of $4.68 per share on sales near $72.3 billion.

Data-centric revenue should grow by high-double-digit percentages throughout the new fiscal year, while PC-centric sales should fall due to a shrinking addressable market.

I did a double take at the guidance above because the first-quarter growth was matched with far slower increases for the full year. After double-checking my math, I found the explanation in Intel's earnings call. Management never mentioned hot-button topics from recent quarters such as "China" or "tariffs," but there's a solid business reason for the off-kilter distribution of Intel's guidance targets.

"We're expecting an exceptionally strong Q1 as cloud customers continue to build capacity and adopt our highest-performing products," said CFO George Davis. "This will mark three quarters of strong cloud buildout and we expect more modest capacity expansion for the remainder of the year, as [cloud service providers] move to a digestion phase."

So Intel's data center sales will ride a dramatic roller coaster in 2020 thanks to massive order volumes in the first quarter followed by a sharp slowdown.

Close-up photo of a complicated roller coaster with many twists, loops, and sharp turns.

Image source: Getty Images.

Hold your horses in 2020 -- this could be a wild ride

The cloud computing market is coming up strong right now and bringing Intel along for the ride. We'll see how the market reacts later this year when the softer second-half business trends that management forecast actually play out. I wouldn't be surprised to see Intel's stock riding a pretty hilly roller coaster of its own, providing several short-term dips where opportunistic investors can pick up shares at a temporary discount.

My own Intel holdings will sway along with those moves, too. That's fine since I have no intention of selling my shares anytime soon, and the dividend reinvestment plan helps me pick up some Intel shares on the cheap along the way.

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