Should You Buy Intel Stock Ahead of Q3 Earnings?

Intel (INTC 1.77%) will have another chance to infuse some life into its lagging stock price performance when it releases its third-quarter results on Thursday, Oct. 21. Shares of the chip giant have underperformed the broader market so far this year despite starting off brightly as cracks in the personal computing and data center businesses have widened on account of stiff competition from the likes of Advanced Micro Devices.

Let's look at what's expected from Intel's upcoming quarterly report and determine whether it could deliver strong enough results and outlook to turn investor sentiment back in its favor.

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Intel needs to tick all the boxes

Intel's second-quarter results, released in July, were better than expected. The company's adjusted earnings of $1.28 per share increased 12% year over year and easily exceeded the Wall Street estimate of $1.06 per share. Its revenue increased 2% over the prior year to $18.5 billion. What's more, Chipzilla had also raised its full-year revenue by $1 billion to $73.5 billion, while bumping up the earnings-per-share guidance by $0.20 to $4.80 per share.

However, these weren't enough to change investor sentiment, as a closer look showed that the competition is proving to be a thorn in the flesh for the chip giant. For instance, the company expects adjusted gross margin of 55% in the third quarter, which would be a significant contraction over the 59.2% reported in Q2. At the same time, Intel's revenue from the data center group fell 9% year over year to $6.5 billion as both shipments and average selling prices fell.

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The year-over-year revenue growth of 6% to $10.1 billion from the client computing group was accompanied by a drop in the ASPs of both notebooks and desktop processors. More specifically, notebook ASPs were down 17% over the prior year while desktop ASPs declined 5% -- a result of Intel's strategy to cut prices of its processors in order to move more units.

So Intel needs to not just deliver a solid set of results but also to show that it is regaining its mojo against AMD by cornering more market share. However, Intel's full-year guidance doesn't indicate that's going to be the case. The company's fourth-quarter revenue is expected to drop 8.6% year over year to $18.25 billion, while earnings are expected to contract to $1.01 per share from $1.52 per share a year ago.

For comparison, Intel could put up a much better performance in Q3, with revenue and earnings expected to remain flat year over year. All of this indicates that Intel stock could end up lagging the broader market for the remainder of the year. But investors shouldn't miss the fact that certain silver linings on the horizon could breathe life into the stock in 2022 and beyond.

Chances of a turnaround are on the horizon

Wall Street expects Intel's top-line decline to slow down in 2022, with the company's revenue anticipated to remain flat at 2021 levels. In 2023, analysts expect Intel to regain its mojo with a slight increase in revenue.

Data source: YCharts.

However, don't be surprised to see Intel turn its fortunes around faster, as it is all set to step up its game on the product development front. Chipzilla's product roadmap indicates that it will move to a 7-nanometer manufacturing process in the second half of 2022. A smaller node size means that Intel's chips will get more competitive. That's because the transistors in a chip made using a smaller node are more closely packed together, leading to improved performance and higher efficiency.

The company promises a 20% increase in performance per watt over its current-generation chips when it releases processors based on the 7nm process, codenamed Intel 4. Then, in the second half of 2023, Intel plans to bring out an advanced version of its 7nm chips that it claims could be 18% more powerful than the Intel 4 chips. This will be followed by the Intel 20A architecture in 2024 when the company is expected to manufacture chips based on the 5nm node.

All of this indicates that Intel is on track to consistently improve its manufacturing process, which should help it bridge the technology gap with AMD. So Intel can eventually regain its mojo and become a rewarding investment, but investors will have to wait for that turnaround patiently, as it may take some time to arrive. The good part is that patient investors willing to bet on a turnaround at Intel could buy this tech stock at just 12 times trailing earnings, which may prove to be a bargain in the long run once its fortunes start looking up.