The economy has been the single biggest factor driving Wall Street over the past year with technology stocks taking the biggest beating. Investors have been watching financial reports closely for indications of where things might go from here and paying particular attention to what executives have to say about the ongoing macroeconomic headwinds. So when Intel (INTC -0.38%) reported its earnings, management's commentary took on a whole new importance.
While the company's results were disappointing, it was what executives had to say about the future that turned heads. Management's comments suggest tough times lie ahead -- not only for Intel but for rivals Nvidia (NVDA 3.65%) and Advanced Micro Devices (AMD 2.44%) as well.
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A swing and a miss
Investors were expecting the challenging macroeconomic conditions to affect Intel's results, but things were worse than many anticipated. Fourth-quarter revenue of $14.0 billion fell 32% year over year, resulting in adjusted earnings per share (EPS) of $0.10, which plunged 92%. To give those numbers context, analysts' consensus estimates were calling for revenue of $14.5 billion and EPS of $0.20, so Intel's results missed the mark by a wide margin.
Fueling the dismal results were challenges across Intel's largest segments. Revenue from the client computing group (PCs and laptops) slumped 36% year over year to $6.6 billion, while data center and artificial intelligence revenue fell 33% to $4.3 billion. The network and edge segment held up better but still edged 1% lower to $2.1 billion.
Yet as disappointing as the financial results were, it was Intel's outlook that spooked investors across the semiconductor industry.
The big bad
Intel's outlook was the first shoe to drop. In the first quarter, management expects revenue to fall 40% to $11.0 billion at the midpoint of its guidance while swinging to an adjusted loss per share of $0.15, compared to EPS of $1.34 in the prior-year quarter.
The speed at which Intel's business fell off a cliff took the market by surprise, sending many Intel investors running for the exits. Perhaps more alarming, however, was when the second shoe dropped -- management's comments about what it expects from the economy in 2023.
Intel said it expects "persistent economic headwinds through at least the first half of 2023." While that part wasn't a surprise, comments from CEO Pat Gelsinger about the state of the data center market raised eyebrows (emphasis mine).
"We expect Q1 server consumption TAM [total addressable market] to decline both sequentially and year over year at an accelerated rate, with 2023's first-half server consumption TAM down year on year, before returning to growth in the second half," Gelsinger said on the earnings call.
While that's not the end of the world, it highlights the growing importance of the data center market to the semiconductor industry, and what it could mean for upcoming results.
Things could get ugly for Nvidia and AMD
To understand the implications for Nvidia, one need only review its recent results and the challenges. For the first nine months of fiscal 2023 (which started Jan. 31, 2022), the data center segment was responsible for 54% of Nvidia's total revenue, up from 39% in fiscal 2022.
Furthermore, in its fiscal 2023 third quarter (ended Oct. 30, 2022), Nvidia's data center segment did all the heavy lifting as revenue grew 31% year over year to $3.8 billion. At the same time, gaming revenue -- which has historically represented the lion's share of Nvidia's sales -- plunged 51% to $1.6 billion. Overall, revenue of $5.9 billion tumbled 17%.
AMD's results have held up better so far this year, but the company is similarly dependent on its data center business. The segment represented 24% of its revenue during the first nine months of 2022, compared to 22% during the prior-year period.
Context matters
While it's easy to see why Nvidia and AMD investors would be nervous, it's important to put this information in context. It was just May of last year that Nvidia and AMD each reported record quarterly sales with revenue growing 46% and 71%, respectively. The timing of their decelerating revenue growth coincides with the downturn in the macroeconomic environment. This suggests that Nvidia and AMD will get their groove back once the economy regains its footing.
It's also important to remember that investing is a marathon, not a sprint. While there will no doubt be challenges ahead, over the long term, Nvidia and AMD have proven their mettle. In fact, I'd argue that three to five years from now, investors who held their ground -- or even bought shares of Nvidia or AMD -- will be glad they did.
