Intel (INTC 0.40%) has let investors down over the past year as intense competition from the likes of Advanced Micro Devices (AMD 0.40%) has hamstrung the chip giant. Chipzilla's shares have severely underperformed the broader PHLX Semiconductor Sector Index, which has gained impressively amid a global boom in chip demand.
Investors will be hoping for a turnaround in Intel's fortunes when it reports its second-quarter results on Thursday, July 22. After all, the company has shown in recent months that it is capable of putting up a fight against rivals that have been chipping away at its huge market share in PCs and data centers. But can Intel deliver? Let's find out.
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Intel needs to inspire investors, but can it?
Intel's stock price performance began 2021 on a promising note, but the rally was cut short when it released its first-quarter results in April. Adjusted quarterly revenue was flat year over year at $18.6 billion. Intel's margins took a big hit, with the adjusted gross margin falling 6.1 percentage points year over year. The operating margin fell 6.7 percentage points. Not surprisingly, adjusted net income was down 6% over the prior-year period.
If the results were bad, Intel's guidance wasn't inspiring, either. It guided for Q2 earnings of $1.05 per share on revenue of $17.8 billion, down from the year-ago period's adjusted earnings of $1.23 per share and revenue of $19.7 billion. For the full year, Intel guided for $72.5 billion in adjusted revenue and $4.60 per share in earnings. Again, that would be lower than 2020's revenue of $77.9 billion and earnings of $5.30 per share.
The simplest way for Intel to regain investor confidence would be to beat the Q2 estimates and raise its full-year guidance. However, Intel may find it tough to deliver on those lines because of the challenges it is facing in its two largest business segments.
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The two big problems
The client computing group (CCG) is Intel's largest source of revenue, generating $10.6 billion in sales in Q1 and accounting for nearly 57% of the top line. The segment's revenue was up 8% year over year in Q1 thanks to record demand for notebook processors. Intel said in April that it saw a 54% year-over-year increase in notebook unit volumes, but it was accompanied by a major downside. The higher demand for entry-level laptops led to a 20% year-over-year decline in the average selling price of the CCG platform.
Meanwhile, the recent market share gains Intel has scored are coming at the cost of margins. The company had slashed prices earlier this year to lure customers away from AMD as the latter was unable to make enough processors to meet demand. AMD, on the other hand, has improved its pricing power thanks to the better performance of its Ryzen CPUs. So, market share gains alone may not be enough for Intel's CCG to turn in a strong performance.
Throw in the fact that AMD has been pushing the envelope in both notebook and desktop processors, and Intel's turnaround seems a tad difficult.
"Ryzen Mobile 5000 Series processor revenue has ramped twice as fast as the prior generation," CEO Lisa Su said in April. "We expect continued growth in 2021 as the number of notebook platforms powered by our new processors is on track to increase by 50% compared to our prior generation."
Meanwhile, Intel's 10-nanometer Alder Lake desktop processors, which are supposed to compete with AMD's current 7-nanometer Ryzen processors, are expected to arrive only in late 2021. So, it won't be surprising to see AMD sustain the impressive sales of its Ryzen processors, especially considering that it has been taking steps to increase supply.
On the other hand, the data center group (DCG) is also down in the dumps thanks to AMD's EPYC server chips. Intel's DCG revenue, which accounted for 30% of total sales in Q1, was down an alarming 20% year over year to $5.6 billion. Again, the technological advantage of AMD's third-generation EPYC server processors means that Intel will find it difficult to claw back the lost market share in this niche.
Third-party tests conducted by Tom's Hardware also establish the supremacy of AMD's server chips over Intel's Ice Lake offerings. Additionally, AMD's chips are priced very competitively to their Intel counterparts. What's worse is that Intel is unlikely to catch up to AMD any time soon as it has delayed the production of its next-generation Sapphire Rapids data center CPUs to April 2022. AMD shares jumped on the news of this delay, as the chipmaker now has a clearer path toward more server market share.
Investor takeaway
The odds are stacked against Intel going into Q2 earnings. It is lagging on the technology front when compared to AMD, and that may not change any time soon. Not surprisingly, analysts expect Intel's woes to continue into 2022, with earnings and revenue expected to shrink.
As such, buying Intel stock doesn't look like a good idea right now. There are other tech stocks that are likely to deliver more upside than Intel, which may continue to underperform until it gets more competitive.
