Intel's (INTC +1.14%) stock tumbled nearly 12% on Oct. 22 after the chipmaker posted its third-quarter earnings report.
Its non-GAAP revenue, which excludes the upcoming sale of its NAND memory business to SK Hynix, rose 5% year over year to $18.1 billion, but missed expectations by $170 million. But its non-GAAP earnings still increased 59% to $1.71 per share, which easily beat expectations by $0.60.
Those results weren't disastrous, but they indicate Intel's ambitious turnaround plans have yet to bear any fruit. Let's review Intel's main challenges, and whether or not its stock is worth buying after its post-earnings plunge.
Image source: Intel
Intel's uphill battle
When Pat Gelsinger took the helm as Intel's new CEO in February, he immediately faced three major challenges.
First, Intel's foundries had fallen behind Taiwan Semiconductor Manufacturing Company (TSMC) (TSM +0.42%) and Samsung in the "process race" to manufacture smaller and more advanced chips. Intel had also repeatedly delayed its newer chips, resulting in shortages that infuriated its PC and data center customers. Gelsinger's predecessor, Bob Swan, had even considered entirely giving up on manufacturing chips to turn Intel into a "fabless" chipmaker that outsourced its production to TSMC.
Second, AMD (AMD 2.33%) -- which has been led by a visionary CEO and already outsourced the production of its chips to TSMC -- pulled ahead of Intel in the process race and proceeded to grow its market share in the PC and data center markets with its Ryzen and Epyc CPUs, respectively.
Lastly, the entire world was struggling with a shortage of chips. Intel's own technical limitations were contributing to that shortage, and it struggled to upgrade its own plants to meet the market's feverish demand for new chips.
An ongoing slowdown
Intel's revenue rose 8% in 2020. But all of that growth occurred in the first half of the year, as stay-at-home trends sparked sales of new PCs and the soaring usage of cloud services drove demand for new data center chips.
Intel's revenue then declined year over year in the third and fourth quarters of 2020 as its data center group (DCG) -- once considered to be the company's core growth engine -- struggled with declining sales.
The DCG business remained weak throughout the first half of 2021, mainly due to challenges in China and competitive pressure from AMD, and only returned to growth in the third quarter. Its client computing group (CCG) business, which mainly produces its PC CPUs, fared better in the first half as it benefited from pandemic-related tailwinds, but lost its momentum in the third quarter as other component shortages throttled sales of completed PCs.
|
Revenue Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
|---|---|---|---|
|
Data center group |
(20%) |
(9%) |
10% |
|
Client computing group |
8% |
6% |
(2%) |
|
Total (Non-GAAP) |
0% |
2% |
5% |
Source: Intel. YOY = Year-over-year.
Intel expects its non-GAAP revenue to decline 3% in the fourth quarter and rise just 1% for the full year. It expects its non-GAAP EPS to decline 41% in the fourth quarter and come in roughly flat for the full year.
By comparison, analysts expect AMD's revenue and earnings to surge 60% and 93%, respectively, this year.
Don't expect a quick recovery
Instead of turning Intel into a fabless chipmaker like AMD, Gelsinger is doubling down on Intel's manufacturing efforts by spending tens of billions of dollars on new plants and expanding its third-party foundry capabilities.
Intel believes that expansion, which it's pressing American and European governments to subsidize, will enable it to reclaim the process lead from TSMC and Samsung by 2025. It also believes the expansion of its plants will reduce the world's overall dependence on TSMC and Samsung.
During the conference call, Gelsinger said Intel was still in the "early stages" of that journey, but that its business was "getting better every day." However, Gelsinger also expects the chip shortage to drag on to 2023, and for Intel to boost its capital expenditure from $18-19 billion in 2021 to $25-$28 billion in 2022 to develop new chips and increase its capacity.
In other words, Intel will be significantly increasing its expenses as the chip shortage throttles its ability to sell new chips. Meanwhile, AMD simply needs to rely on TSMC's aggressive spending plans (with a target of $100 billion over the next three years) to stay ahead of Intel.
If Intel manages to reclaim the process lead, attract big subsidies, and pull fabless chipmakers away from TSMC and Samsung, Gelsinger's turnaround plan could pay off. But if it fails to achieve all three things, its growth could stagnate for years after the chip shortage ends.
Intel's stock is cheap for obvious reasons
Intel's stock might seem like a bargain at 9.3 times forward earnings, but it's cheap because its growth has stalled out. Its dividend yield of 2.7% might look tempting, but it could be reduced if Intel decides that cash ($4.2 billion in the first nine months of 2021) is better allocated toward capital expenditure.
I said it last month, and I'll say it again: The risks of owning Intel still outweigh the potential rewards. For now, investors should stick with other blue-chip tech stocks until green shoots actually start to appear at Intel.
