Intel (INTC +2.50%) posted its first-quarter report on April 27. The chipmaker's revenue dropped 36% year over year to $11.7 billion but still beat analysts' estimates by $570 million. Its adjusted net loss of $169 million was down sharply from its net profit of $3.6 billion a year earlier, but its adjusted loss of $0.04 per share still cleared the consensus forecast by $0.10.
Intel's stock popped 4% after the company exceeded those low expectations, but it remains more than 50% below its all-time high from just over two years ago. Does that post-earnings pop suggest that it's finally safe to buy shares of the chipmaker?
Image source: Getty Images.
What happened to Intel?
Intel is still the world's largest manufacturer of x86 chips for PCs and servers, but it's faced an existential crisis over the past decade for three reasons.
First, the rise of Arm-based chips threatened to eventually render x86 chips obsolete because they were more power-efficient, more customizable, and better suited for mobile devices.
Second, Intel's own foundries fell behind Taiwan Semiconductor Manufacturing (TSM +0.29%) and Samsung in the process race to manufacture smaller, denser, and more power-efficient chips. As a result, rival AMD (AMD 3.71%), which outsourced all of its production to Taiwan Semi, overtook Intel with cheaper and more advanced x86 chips.
Between the first quarters of 2017 and 2022, Intel's share of the x86 CPU market plunged from 81.9% to 62.7%, according to PassMark Software. AMD's share nearly doubled from 18.1% to 34.7%.
Finally, Intel repeatedly resisted calls to abandon its own foundries and become a fabless chipmaker like AMD. Instead, Intel doubled down on upgrading and expanding its foundries in an 11-hour attempt to catch up to Taiwan Semi and Samsung. That costly strategy caused Intel's expenses to spike and forced it to reduce its dividend by 65% earlier this year.
NASDAQ: INTC
Key Data Points
How long will Intel's downturn last?
The market's surging demand for new PC and data center chips throughout the pandemic -- which was driven by remote work, high-end gaming, and the feverish usage of cloud services -- temporarily masked Intel's existential challenges.
But after the pandemic's economic effects eased, PC shipments dropped off a cliff and the macro headwinds forced data centers to rein in their spending. As a result, Intel's revenue declined year over year for five consecutive quarters and it's remained unprofitable on an adjusted basis over the past two quarters.
During Q1, Intel generated 50% of its revenue from its client computing group (CCG), which produces its PC CPUs. Another 32% came from its data center and AI (DCAI) group, which houses its data center and programmable chips, while 13% came from the network and edge (NEX) group, which provides networking products and edge computing chips. Here's how those three core businesses fared over the past year.
|
Segment |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
CCG revenue growth (YOY) |
(13%) |
(25%) |
(17%) |
(23%) |
(38%) |
|
DCAI revenue growth (YOY) |
22% |
(16%) |
(27%) |
(15%) |
(39%) |
|
NEX revenue growth (YOY) |
23% |
11% |
14% |
11% |
(30%) |
|
Total revenue growth (YOY) |
(1%) |
(17%) |
(15%) |
(28%) |
(36%) |
Data source: Intel. YOY = year over year.
Intel's segment revenue is still plunging across the board, but there might be a light at the end of the tunnel. For the second quarter, Intel expects its revenue to decline 18% to 25% year over year -- but rise nearly 3% sequentially at the midpoint -- reaching $11.5 billion to $12.5 billion. Therefore, the first quarter might just mark the trough of Intel's cyclical downturn.
Its margins could gradually stabilize
As Intel's revenue declines, it's divesting its non-core businesses, reducing salaries, and cutting other costs to free up more resources for its foundries. Its adjusted margins are still dropping, but they might bottom out in the near future.
|
Metric |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Adjusted gross margin |
53.1% |
44.8% |
45.9% |
43.8% |
38.4% |
|
Adjusted operating margin |
23.1% |
9.2% |
10.8% |
4.3% |
(2.5%) |
Data source: Intel.
Intel expects its adjusted gross margin to decline more moderately to 37.5% in the second quarter. CFO Dave Zinsner said that while the company's gross margins were still "well below acceptable levels," he expects some of its costs to "unwind later this year as new products launch."
As for the longer-term challenges, CEO Pat Gelsinger said Intel was hitting "key execution milestones" and remained confident in the expansion of its foundry business -- which it's trying to accelerate with government subsidies and its planned takeover of Tower Semiconductor (TSEM +0.01%) -- to "capitalize on the $1 trillion market opportunity ahead."
Is it the right time to buy Intel?
Intel's stock still isn't cheap at about 60 times forward earnings, and that multiple could stay high as long as its profits keep slipping. By comparison, AMD and Taiwan Semi trade at 29 and 17 times forward earnings, respectively. Intel's reduced forward yield of 2.1% also won't meaningfully limit its downside potential. So for the time being, I'd rather stick with cheaper and more resilient semiconductor stocks (like Taiwan Semi) instead of betting on Intel's sluggish and costly turnaround.
