Heading into Intel's (INTC 1.77%) fourth-quarter earnings report, investors knew the semiconductor industry was struggling, but Intel's results were still astonishingly bad. The chipmaker posted a dismal report across the board, missing analyst estimates on the top and bottom lines, and its guidance even called for a loss in the first quarter of 2023.
Intel had a rough Q4
Intel's fourth-quarter revenue plunged 32% year over year, or 28% on an adjusted basis, to $14 billion, below the analyst consensus estimate of $14.5 billion. The company cited economic and market headwinds, which include falling prices in the chip market and declining demand for PCs. Sales plunged in its two core business segments: The client computing group, which is primarily PCs, was down 36% year over year, and the data center and artificial intelligence segment was off 33%.
Its performance further down the income statement was even worse. Gross margin collapsed by 14.5 percentage points to 39.2%, and adjusted operating margin plunged from 28.2% to 4.3%. On the bottom line, Intel's adjusted earnings per share fell from $1.15 in the quarter a year ago to just $0.10, missing the analyst consensus estimate of $0.20.
Lastly, management's first-quarter guidance called for Intel's performance to further deteriorate with a forecast for revenue of just $10.5 billion to $11.5 billion, which represents a 40% year-over-year decline at the midpoint and was much worse than the average estimate at $13.9 billion. On the bottom line, management expects an adjusted loss of $0.15 per share, compared to the consensus of a $0.24-per-share profit.
Intel's results might mostly reflect the difficult environment for chipmakers, especially those in the PC and data center industries. But they also highlight the company's own execution problems as well as its failure to adapt to market demand.
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Intel has a long history of value destruction
Intel was one of the darlings of the dot-com era, but since then, the stock has gone almost nowhere. It's still down from its peak in 2000, and you could have bought shares at any point since then and still underperformed the market.
Intel's business has steadily grown over the last 20 years, but a combination of multiple compression (when a company's earnings increase, but its stock price does not move in response), market share losses, and falling profit margins have weighed on it and even erased most of the gains over the last decade.
A series of poor management decisions, execution problems, and misguided acquisitions have cost investors over the years, and the company fell behind rivals as the semiconductor industry boomed. Advanced Micro Devices has consistently grabbed market share from it in the PC market, Taiwan Semiconductor Manufacturing has left it behind in manufacturing advanced chips, and it's missed out on newer markets that peers like Nvidia and Broadcom have captured.
As the chart below shows, all four of those stocks have trounced Intel over the last decade, a sign that its errors are primarily self-inflicted.
Intel's dependence on the PC market means it's exposed to one of the slower-growing areas of the chip industry, and it's struggled with manufacturing, making AMD look smart for outsourcing fabrication to foundries like TSMC.
The company has also made a number of questionable acquisitions over the years, including Altera, a maker of programmable logic chips, which has fallen behind rival Xilinx.
After acquiring Barefoot Networks in 2019, it just announced it would no longer produce the network-switching chips Barefoot makes. Intel is in the black on its Mobileye acquisition, but its current valuation is well below the company's $50 billion target at the time it announced the initial public offering, and at least part of the reason for the spinoff seems to be that Mobileye's founders were chafing under Intel's management.
Intel is a classic value trap
While Intel's returns have underwhelmed, there was a silver lining for investors: The chip stock has long been a reliable dividend payer. But even that could be at risk now. In 2022, the company lost $9.4 billion in free cash flow, and the first-quarter guidance indicates that the company is likely to burn cash at least through the first half of the year. It also has more than $40 billion in debt on its balance sheet.
Intel aims to cut annual costs by $8 billion to $10 billion by 2025 as it prepares to invest as much as $120 billion on two new fabrication foundries in the U.S. But bridging the cash gap could be difficult because those plants won't come online for years, and they represent considerable risk. The company spent $6 billion on dividends last year, and if the chip market continues to weaken, its 5.2% yield could be at risk as well. If it is forced to cut or suspend its dividend, the stock will only dive further into a tailspin.
At this point, Intel is getting slammed by market headwinds and has a long track record of poor investment decisions and value destruction. It has fallen behind competitors and is burning billions in cash. If you're looking to invest in the semiconductor sector, don't be fooled by Intel's seemingly cheap valuation. There are many better options in the industry.
