Please ensure Javascript is enabled for purposes of website accessibility

Intel's Data Center Business Disappoints in Q3

By Evan Niu, CFA – Oct 24, 2020 at 1:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The chip giant is experiencing weakness in the data center while rivals make inroads.

Shares of Intel (INTC -6.41%) tanked yesterday after the company reported disappointing third-quarter earnings results. Investors were rattled by a 7% drop in Data Center Group (DCG) revenue, one of the company's largest and most profitable businesses. Intel also warned that the challenges will remain next quarter.

Here's what investors need to know.

Intel sign in front of headquarters

Image source: Intel.

Continuing weakness

DCG revenue in the third quarter declined by 7% to $5.9 billion, which led to a 39% drop in DCG operating income due to lower average selling prices (ASPs) and the loss of operating leverage.

Sales shifted from the enterprise and government market to cloud service providers. Revenue from cloud service providers was up 15% while sales to the enterprise and government market plunged by 47%, which Intel attributed to the macroeconomic uncertainty caused by the COVID-19 pandemic.

"In Q4, we anticipate COVID-19 impacts will drive weaker demand in our data-centric businesses and demand in the cloud service providers market segment to moderate," Intel cautioned in its quarterly filing.

On the bright side, the Client Computing Group (CCG) saw sales increase modestly to $9.8 billion, as the broad shift to remote work has boosted demand for laptops and workstations. However, the strength in CCG wasn't nearly enough to offset the weakness in DCG.

A stark contrast with NVIDIA

The results stand in contrast to fabless rival NVIDIA (NVDA 2.84%), which has been making inroads in the data center. The graphics specialist saw data center revenue skyrocket by 167% to $1.75 billion last quarter, although that includes results from Mellanox; NVIDIA closed its acquisition of the networking equipment company in April. Mellanox represented approximately 30% of NVIDIA's data center business in the fiscal second quarter. While Intel is struggling in data centers, NVIDIA is making strides with its new Ampere architecture.

"The biggest news in data center this quarter was the launch of our Ampere architecture," NVIDIA CFO Colette Kress commented on the last earnings call. "We are very proud of the team's execution in launching and ramping this technological marvel, especially amid the pandemic."

NVIDIA is looking to build on its data center momentum with the recent acquisition of Cumulus, which makes networking software and "augments our Mellanox acquisition in building our open modern data center." NVIDIA is forecasting data center revenue to grow by low- to mid-single-digit percentages next quarter on a sequential basis, which looks particularly good when compared to Intel's gloomy outlook.

In the wake of the release, Bank of America analyst Vivek Arya downgraded his rating on Intel shares from neutral to underperform, warning that the company faces numerous execution risks, including a manufacturing strategy that has lacked clarity combined with intensifying competition from NVIDIA and other Arm-based chipmakers. The analyst cut his price target on the stock from $60 to $45.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.