What happened
Shares of Intel (INTC 1.48%) were down mildly throughout the day today, but plunged toward day's end to finish down 4.3% in today's trading.
While investors cautiously await the Federal Reserve's meeting that begins tomorrow, Intel held its Innovation Conference today, which actually contained several positive product announcements.
However, the last speaker of the day was CFO David Zinsner. When peppered with questions about how new innovations might affect Intel's financials in the near term, some may have been disappointed by his answers.
So what
Intel had been riding a pretty strong wave of enthusiasm recently. Last month, its CEO noted the third quarter would be above the midpoint of guidance, and also explained that Intel was on track for its "five nodes in four years" to catch up to Taiwan Semiconductor Manufacturing on leading-edge technology.
Tuesday's presentation actually reinforced a lot of Intel's product momentum. The company reiterated its product roadmap was on track, including that its new Xeon data center processor would be available Dec. 14. Intel also announced a new innovative advanced packaging technology called Universal Chiplet Interconnect Express (UCIe), which will only become more important as chipmakers move toward chiplet architectures for AI accelerators and other leading-edge processors.
Speaking of AI, Intel reiterated that it was building out a full AI supercomputer based on its Gaudi AI accelerators and Xeon processors, with start-up Stability.ai as its customer, along with other innovation in its open-source software development toolkit for AI.
Still, this turnaround and technology catch-up, while on track, is taking lots of capital to execute, and investors are anxious for Intel's massive cash flow losses to turn into gains. So when Zinsner took the stage to answer questions, his answers may have taken some of the wind out of the sails of Intel's recent rally.
In his remarks, he reiterated that while the next quarter is tracking well, the company's data center revenue will still be down year over year, and initial guidance entailed a rather "dim" view to begin with. He also stated that the company hoped to get to around cash flow breakeven by the end of next year, which may have been disappointing to some.
Investors may have clung to hopes that Intel's core PC market has hit bottom, and that the data center would perhaps turn around to growth earlier, given positive remarks at recent industry conferences. However, the positivity appears to have been based on a rather low bar, so investors may have to wait longer to see a profit payoff.
Now what
Intel's turnaround strategy is probably the correct one to attempt, and its execution seems to be on track; however, investors really won't be able to judge its effectiveness for a while. This is why Intel's stock has underperformed relative to its sector over the past few years, even as new CEO Pat Gelsinger has gotten to work on the turnaround.
Investors should keep in mind that Intel's gross margins probably won't get back to their historical 60% or above until the company regains process leadership, which Intel has always stated won't be until 2025. That means more start-up costs and spending through 2024, and that's why profits may remain elusive for the next year-plus, even if end markets recover from current lows.
While today was a disappointment, if Intel can execute, the stock should eventually go higher, given that it's now much cheaper than its main rivals on a market cap basis.
