Intel (INTC +1.07%) could not have kicked off 2023 in worse fashion. Its fourth-quarter 2022 earnings were near the bottom of the already not-great guidance it had provided a few months ago, and the first quarter of 2023 is going to be even uglier. Intel has a very difficult and expensive uphill battle ahead of it as it tries to catch up to its peers on multiple fronts.
By some metrics, Intel may actually appear like an incredible value at this point. Indeed, the stock price hasn't been this low in years and trades for less than 1.7 times trailing-12-month sales -- a meager metric that semiconductor stocks rarely trade for. But there are good reasons for the pessimism a would-be value hunter should be aware of, because Intel could very well be a value trap (a stock that looks cheap but isn't).
NASDAQ: INTC
Key Data Points
Intel's silver lining isn't much more than a consolation prize
Intel's Q4 2022 revenue and non-GAAP (adjusted) earnings per share (EPS) fell a respective 32% and 92% compared to a year ago. Things will get worse before they get better. Revenue, at the midpoint of guidance, will fall another 40% year over year in the first quarter of 2023. Adjusted EPS will swing to negative $0.15, compared to positive $0.87 in Q1 2022.
CEO Pat Gelsinger and the top team also declined to provide any full-year 2023 guidance. While it somewhat echoed second-half 2023 optimism as the chip industry deals with excess inventory in PCs and laptops, it left open the possibility that full-year 2023 earnings and free cash flow could wind up being in the red. In other words, based on current and immediate-term profitability (or complete lack thereof in this case), Intel is no value stock.
Gelsinger and company have often pointed out (including on the last earnings call) that the company is rapidly improving its process manufacturing to catch up with Taiwan Semiconductor Manufacturing (TSM +1.40%). I take issue with this, though. While Intel is indeed catching up to AMD (AMD +3.50%) with its designs for PC and laptop processors -- currently Intel's bread-and-butter -- it's terrible timing. Consumers are pulling back on computer spending in grand fashion. Market share gains for Intel, yes, but it's a shrinking market. Plus, there's also Apple (AAPL 0.01%) and its top-notch in-house design M-series chips for its MacBooks, which are clobbering Intel in computing performance.
And then there's the data center segment, where all the semiconductor industry growth is really to be had these days. Intel is still woefully behind and ceding market share here to AMD, which has dramatically shifted its focus away from consumer-facing products to emphasize enterprise chips for the cloud and data centers. While AMD and others grow in this department, Intel is in retreat.
|
Intel Segment |
Q4 2022 Revenue |
YOY Increase (Decrease) |
|---|---|---|
|
Client computing group (CCG) |
$6.6 billion |
(36%) |
|
Data center and AI |
$4.3 billion |
(33%) |
|
Network and edge (NEX) |
$2.1 billion |
(1%) |
|
Mobileye (MBLY +0.42%) |
$565 million |
59% |
|
Accelerated computing and graphics (ACX) |
$247 million |
1% |
|
Intel Foundry Services (IFS) |
$319 million |
30% |
Data source: Intel.
Intel promises it will recapture its design and manufacturing leadership by 2025. Maybe it will. But that will be an expensive endeavor that will hinge on new (and incredibly expensive) equipment purchased from ASML (ASML +2.05%). Thus, I think Intel's most bullish silver lining from its recent investor updates is more of a nod to ASML than a boon to Intel.
Deprioritizing its current superstars
Moving beyond Intel's top revenue segments, there appeared to be more good news from the Network and edge (NEX) segment, as well as from automotive technology chip subsidiary Mobileye. But not so fast!
Though the NEX segment held up relatively well in the last year (it reported record revenue in 2022), Intel is in cost-cutting mode to try and shore up its withering profit margins. In its search for cash, it has decided to cut future investments into NEX -- specifically its network-switching portfolio. Unfortunately, in the world of chip design, stopping investment in research and development is essentially waving the flag in surrender.
The investment cut apparently includes the Tofino ethernet switch chips, which trace their roots to a small acquisition in 2019. But even in this department, Intel is lagging behind the competition from the likes of Broadcom, Marvell Technology Group, and more recent entries into the space like Nvidia, which acquired network switching specialist Mellanox in early 2020.
Basically, up to $9 billion in annual revenue from Intel NEX could now be up for grabs.
And what of Mobileye, a leader in providing chips for advanced driver assist systems (ADAS) and self-driving car chips? Remember that Intel partially spun out Mobileye in 2022 and sold 5% of its stake to raise some cash. Up to this point, Intel has indicated it could use Mobileye's relisting on stock exchanges to sell shares and raise cash. If I were an Intel shareholder, I would hope this isn't the plan. That would be akin to treating your star racehorse like a dairy cow.
For the time being, Intel says it still owns 94% of Mobileye shares.
There needs to be better news to warrant a buy
With most other semiconductor companies remaining profitable and indicating their businesses will return to growth by the second half of 2023, Intel's current outlook is dismal. Revenue is in sharp retreat and could remain so for the foreseeable future. Moreover, the balance sheet is in just OK shape, with cash and short-term investments of $28 billion, offset by debt of $42 billion.
Until the company can provide some more concrete guidance on its recovery -- and return to profitability because it certainly should at least be that with $11 billion in quarterly revenue expected in Q1 -- this looks like a value trap. There are far better semiconductor stocks to buy now that have a much better risk-to-reward payoff than Intel stock offers. So I'll double down on what I said a few months ago and say it's way too early to bet on an Intel recovery.
