What happened
Shares of semiconductor giant Intel (INTC 0.35%) were down by 2.2% as of 1 p.m. ET Wednesday after an executive spooked investors with remarks he made at its Innovation Conference Tuesday afternoon.
Already years into an expected turnaround in its chip business, CFO David Zinser disappointed investors when he warned that Intel is still more than a year away from even breaking even on operating cash flow. He also admitted that rather than rebounding, revenue from the company's data center unit (Intel's second-biggest business, according to data from S&P Global Market Intelligence, but stuck in a decline for the past two years) is still declining.
NASDAQ: INTC
Key Data Points
So what
Responding to these revelations Wednesday morning, investment bank Morgan Stanley opined that they were "no big surprise," and mostly took the news in stride. But in another report early Wednesday morning, Citigroup analyst Christopher Danely pointed out that Intel's new guidance is below the consensus of what Wall Street analysts had forecast for the company -- suggesting it may be heading for an earnings miss.
Danely highlighted that Zinser had said that any profit margin improvements that Intel accomplishes this quarter will be "modest." And Intel's efforts to build a chip foundry business (i.e., manufacturing computer chips designed by other companies, for those companies) seem pointless to the analyst, who predicts that profits from such a business will not be "material" for Intel.
Neither Morgan Stanley not Citi has a buy rating on Intel stock, by the way. (Both rate it neutral.) And for good measure, Citi's Danely is recommending that Intel abandon the foundry effort.
Now what
Will Intel take the Citi analyst's advice? That may depend on how much money it has already poured into the foundry effort, and how big of a write-down it would need to take to abandon the project. But if Intel is simply sending good money after bad, then cutting its losses may be the best decision it could make.
Such an exit wouldn't make Intel stock any prettier of an investment. Then again, with its stock priced at more than 35 times next year's expected earnings, Intel already doesn't look particularly cheap. Getting the write-down out of the way now could at least have the beneficial effect of making it easier for the company to get back to earning stronger profits in the coming years.
