Intel's (INTC +1.07%) stock jumped 9% on Oct. 27 after it posted its third-quarter earnings report. The chipmaker's revenue fell 8% year over year to $14.2 billion but exceeded analysts' expectations by $560 million. Its adjusted earnings grew 11% to $0.41 per share and also cleared the consensus forecast by $0.19 per share.
Intel's revenue is still declining year over year, but its stock has already risen about 34% in 2023 in anticipation of the PC market's cyclical turnaround. Does this chip giant still have room to run, or it too late to hop aboard the bullish bandwagon?
Image source: Getty Images.
Reviewing Intel's main challenges
Intel generated 56% of its revenue from its client computing group (CCG) in Q3. That segment mainly sells its x86 CPUs for PCs. Its revenue has declined year over year for nine consecutive quarters as the market's demand for new PCs -- which surged throughout the pandemic -- cooled off in a post-pandemic world.
Fierce competition from AMD (AMD +3.50%), which pulled ahead of Intel in the "process race" to create smaller and denser chips by outsourcing its manufacturing to Taiwan Semiconductor Manufacturing (TSM +1.40%), worsened that slowdown. Intel remains committed to manufacturing its own chips, but catching up to TSMC has been a costly endeavor.
Another 27% of Intel's revenue came from its data center and artificial intelligence (DCAI) group, which produces Xeon CPUs and programmable chips for data centers. That segment's revenue also slumped year over year for five consecutive quarters as the macroeconomic headwinds drove many data center operators to rein in their spending.
The network and edge (NEX) group, which sells networking products and edge computing chips, accounted for 11% of Intel's revenue and also struggled with macro headwinds over the past year. The remaining 6% of top-line sales came from the company's controlling stake in the automotive chipmaker Mobileye (MBLY +0.42%), which it partly spun off in an IPO last October, and its foundries.
Another quarter of sequential growth
All three of Intel's core businesses shrank year over year in Q3. But on a sequential basis, its total revenue actually rose 10%, which was its second consecutive quarter of sequential growth.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
CCG revenue growth (YOY) |
(17%) |
(23%) |
(38%) |
(12%) |
(3%) |
|
DCAI revenue growth (YOY) |
(27%) |
(15%) |
(39%) |
(15%) |
(10%) |
|
NEX revenue growth (YOY) |
14% |
11% |
(30%) |
(38%) |
(32%) |
|
Total revenue growth (YOY) |
(15%) |
(28%) |
(36%) |
(15%) |
(8%) |
Data source: Intel. YOY = year over year.
On a sequential basis, Intel's CCG revenue jumped 16%, its DCAI sales dipped 5%, and its NEX revenue rose 7%. Its foundry services division -- which it aggressively expanded to keep pace with TSMC in the process race -- grew its revenue 34% sequentially and 299% year over year, but still only accounted for 2% of the tech titan's top line.
Nevertheless, the simultaneous growth of Intel's CCG and foundry segments strongly implies the PC market is finally bottoming out. During the conference call, CFO David Zinsner said the company was "encouraged by the return of historical purchasing cycles," with "healthy inventory levels and growing demand." For the fourth quarter, Intel expects its revenue to rise 3%-10% sequentially -- and finally increase 4%-11% year over year -- to $14.6 billion-$15.6 billion.
NASDAQ: INTC
Key Data Points
Gross and operating margins are stabilizing
Intel's gross and operating margins declined over the past year as its revenue growth cooled off and it ramped up the expansion of its first-party foundries. However, its gross margin still expanded sequentially over the past two quarters as its average selling prices improved, and its operating margins strengthened thanks to tighter cost-cutting strategies.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Adjusted gross margin |
45.9% |
43.8% |
38.4% |
39.8% |
45.8% |
|
Adjusted operating margin |
10.8% |
4.3% |
(2.5%) |
3.5% |
13.6% |
Data source: Intel.
For the fourth quarter, Intel expects its adjusted gross margin to expand sequentially and year over year to 46.5% as its adjusted EPS more than quadruples.
During the conference call, Zinsner reiterated Intel's long-term goal of achieving 60% gross and 40% operating margins. The confident outlook implies it won't be rendered obsolete by TSMC or AMD anytime soon.
But is it too late to bet on Intel's recovery?
Analysts expect Intel's revenue and adjusted earnings to decline 22% and 68%, respectively, this year. But for 2024, they forecast its sales and earnings to grow 12% and 176%, respectively, as the PC market finally warms up again.
Based on those expectations, Intel trades at 22 times next year's earnings. By comparison, AMD trades at 24 times forward earnings, while TSMC has a lower forward multiple of 15. Intel still looks reasonably valued relative to its peers, but its low forward dividend yield of 1.4% probably won't limit its downside potential.
In short, I don't think it's too late to bet on Intel's long-term recovery. However, it will need to grow its revenue at a steady rate, expand its margins, and prove it can keep pace with TSMC in the process race in order to drive its stock even higher.
