Intel's (INTC 1.51%) stock dropped 6% on Jan. 27 in response to its dismal fourth-quarter earnings report. The chipmaker's adjusted revenue declined 28% year over year to $14.0 billion, which missed analysts' estimates by $490 million. Its adjusted earnings plunged 92% to $0.10 a share and also missed the consensus forecast by a dime.
For the full year, Intel's adjusted revenue and earnings fell 16% and 65%, respectively, as it grappled with the post-pandemic slowdown of the PC market, stiff competition from AMD (AMD +6.69%), and macro headwinds across the data center market. Inflation also forced it to hike the prices of some of its chips even as the semiconductor market cooled off.
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Intel clearly faces tough near-term headwinds, but its stock has already slumped to its lowest levels in nearly six years. Could this out-of-favor stock bottom out and finally recover over the next 12 months?
Intel's three biggest problems
Intel needs to address three major challenges in 2023: Its loss of the process technology lead to TSMC (TSM +5.33%), its market share losses to AMD, and the tough macro headwinds in the PC and data center markets.
As an integrated device manufacturer (IDM), Intel still designs and manufactures most of its own chips. But in 2020, Intel's first-party foundries fell behind TSMC, the world's top contract chipmaker, in the "process race" to manufacture smaller, denser, and more power-efficient chips. As a result, AMD -- its "fabless" competitor, which outsources the production of its top-tier chips to TSMC -- pulled ahead of Intel with cheaper and more power-efficient CPUs.
Between the fourth quarters of 2018 and 2022, Intel's share of the PC CPU market fell from 77.1% to 62.8%, according to PassMark Software. AMD's share rose from 22.9% to 35.2% as it repeatedly capitalized on Intel's product delays and chip shortages.
In 2021, Intel declared it could surpass TSMC in the process race by 2025. But as of this writing, Intel remains at least one chip generation behind TSMC and is reducing its annual capital expenses to cope with the macro headwinds. Those macro challenges also caused the PC and data center markets, which accounted for 81% of Intel's 2022 revenues, to stall out.
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Key Data Points
Can Intel resolve these issues in 2023?
Intel's numbers could get a lot worse before they get better. For the first quarter of 2023, it expects its adjusted revenue to fall another 37% to 43% year over year, which broadly missed analysts' expectations for a 24% decline. It also expects to report an adjusted loss of $0.15 per share, while Wall Street anticipated an adjusted profit of $0.25 per share.
During the conference call, CEO Pat Gelsinger attributed that slowdown to the "further deterioration" of the PC market and the "diminishing" consumption of data center chips. Gelsinger expects those macro headwinds to "persist at least through the first half of the year with the possibility of second-half improvements." TSMC, which has been growing its top line through this cyclical slowdown, also recently offered a similar outlook for a market recovery in the year's second half.
As for catching up to TSMC, Intel plans to start mass-producing its Intel 3 chips, which are comparable to TSMC's 3nm/5nm nodes, this year. TSMC started mass-producing its 3nm chips in late 2022. Gelsinger insists Intel remains "on track to regain transistor performance and power performance leadership by 2025." Still, the company plans to reduce costs by $3 billion in 2023 while also ramping up its development and production of new chips. CFO David Zinsner believes those savings will "set the stage" to achieve $8 billion to $10 billion in total savings by the end of 2025.
Intel still plans to spend $22.7 billion on capex in 2023, but that's much lower than TSMC's capex target of $32 billion to $36 billion this year. It could be difficult, even with financial aid from the CHIPS and Science Act, for Intel to catch up to TSMC while generating less revenue and spending less money.
Intel needs to make up its mind
For now, analysts expect Intel's adjusted revenue and earnings to decline 5% and 4%, respectively, in 2023. However, Intel's weaker-than-expected first-quarter forecast will likely force them to reduce those estimates. So its stock might seem cheap right now at 16 times forward earnings, but that valuation could rise quickly if those earnings estimates are reduced.
For Intel to be a worthwhile investment again, it needs to make a choice. Should it ramp up its spending and go all-in on taking over TSMC, or simply become a fabless chipmaker like AMD?
Going fabless and outsourcing all of its production to TSMC -- which former CEO Bob Swan briefly considered before being ousted in early 2021 -- would arguably be the simpler and cheaper choice, but Pat Gelsinger seems determined to pour billions of dollars into upgrading its plants to reclaim the process lead.
Unfortunately, Intel's management can't seem to make up its mind. The company is still developing new chips, but it's also cutting costs, divesting non-core businesses, and quietly outsourcing the production of its chips to TSMC on the side. Unless Intel puts its foot down and outlines a clearer strategy in either direction, I believe its stock will either stagnate or decline in 2023.
