The odds were stacked against Intel (INTC -0.38%) going into its second-quarter earnings report. The company still managed to put up a strong showing despite the competitive challenges it has been facing from rivals such as Advanced Micro Devices (AMD 2.44%).
Chipzilla's results, delivered after the bell on July 22, comfortably exceeded the higher end of its guidance range, and management also raised its full-year outlook. One might think a performance like that would have been just what Intel shareholders wanted to see after the company started the year on a disappointing note. However, the beat-and-raise report failed to excite Wall Street, and Intel stock dropped in its wake.
Are investors overly negative about the chipmaker's prospects these days? Or is their pessimism reasonable given the challenges ahead?
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Intel's Q2 numbers exceeded expectations
Intel's revenue increased 2% year over year in Q2 to $18.5 billion while adjusted earnings per share jumped 12% to $1.28 per share. These numbers are impressive considering management had originally guided for earnings of just $1.05 per share on $17.8 billion in revenue.
Even better, management raised its full-year revenue outlook by $1 billion to $73.5 billion, indicating that the company is witnessing an uptick in demand. In the client computing group (CCG) -- Intel's largest source of revenue last quarter -- revenue increased 6% to $10.1 billion, driven by a sharp spike in demand for notebook and desktop processors.
More specifically, sales of Intel's desktop processors shot up 15% while notebook processor volumes increased by 40%. Overall, the volume of client processors it shipped increased 33%.
What's more, CCG's operating margin grew by 7 percentage points to 37%, and its operating income increased by 32% to $3.8 billion. Management credited these improvements to lower inventory reserves as well as lower production costs on the company's 10-nanometer nodes.
However, it seems investors are focusing more on the problems revealed in Intel's latest quarterly report -- issues that could impact its performance in the long run.
Don't overlook the red flags
CCG produced nearly 55% of Intel's total Q2 revenue, so the segment is going to have a big influence on the company's direction. However, when one takes a closer look, it becomes clear that all is not well in the CCG division.
For instance, Intel's notebook processors' average selling price (ASP) was down 17% year over year. The ASP on desktop chips also dropped 5%. Those lower averages prices were the result of a rising proportion of small-core offerings in the mix. In other words, Intel is relying on lower-margin processors to drive overall sales growth. This is nothing new, as the company seems to have lost pricing power to AMD and is therefore pursuing the low-hanging fruit in the processor market to drive sales.
Wall Street is of the opinion that Intel's CCG sales growth was a result of aggressive ordering by original equipment manufacturers, which may have pulled forward demand. If that's the case, it could impact the company's sales in the holiday period. Once chipmakers are able to ramp up production and end the shortage of computer processors in the market, Intel is likely to find itself on the back foot, especially considering the manufacturing delays that are likely to push it further behind on the technology curve.
AMD's Ryzen processors, on the other hand, are selling like hotcakes despite their premium pricing, thanks to their advanced manufacturing process.
Meanwhile, the performance of Intel's data center group (DCG) confirms that the company is losing ground to AMD. That segment's revenue was down 9% year over year to $6.5 billion while operating margin contracted by a whopping 14 percentage points. Management blamed this terrible performance on the "competitive environment," which isn't surprising, as AMD has been eating away at its server market share. That trend is likely to continue.
Intel has delayed the debut of its 10-nanometer Sapphire Rapids server platform until next year, while AMD is expected to move to a 5-nanometer server chip in 2022. This could result in further market share losses for Intel in the server segment.
All of this indicates that Intel isn't out of the woods yet as AMD is stifling its two primary growth drivers. The tech giant's latest earnings report does have some silver linings, but it still has a long way to go to complete its turnaround. That's why it would be a good idea to stay away from Intel stock. If it is going to become worth buying again, the company will first need to regain its pricing power and reclaim the market share it has been losing.
