Intel's (INTC -0.33%) stock declined 12% on Jan. 26 after the chipmaker posted its fourth-quarter earnings report. Its revenue rose 10% year over year to $15.4 billion, beating analysts' estimates by $230 million, while its adjusted earnings jumped 260% to $0.54 per share and cleared the consensus forecast by $0.09 per share.
Those headline numbers looked healthy, but four troubling issues suggest investors should still avoid the stock after its post-earnings plunge.
1. The AI boom isn't boosting its data center sales
During the fourth quarter, most of Intel's growth was driven by its client computing group (CCG), which mainly sells its PC CPUs and accounted for 57% of its top line. Its CCG revenue rose 33% year over year, ending nine consecutive quarters of declines, as PC sales gradually stabilized in a post-pandemic market.
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Unfortunately, Intel's data center and artificial intelligence (DCAI) group, which accounted for 26% of its top line and sells its data center CPUs and programmable chips, posted its sixth consecutive quarter of falling revenue. Its sales dropped 10% year over year and rose 5% sequentially, but Intel expects that brief sequential recovery to fizzle out with another double-digit decline in the first quarter. In other words, the DCAI business still hasn't reached its cyclical trough yet.
Intel's sluggish sales of data center chips aren't surprising given macro headwinds are forcing many companies to rein in their spending on big hardware upgrades. But it also highlights the fact that Intel's data center CPUs simply aren't as crucial as Nvidia's high-end GPUs for processing complex AI tasks.
By comparison, Nvidia's data center chip sales nearly quadrupled year over year in its latest quarter as the generative AI market exploded. That massive difference suggests that Intel could eventually be left behind in the AI market, even though its management mentioned "AI" more than two dozen times during its conference call.
2. Its foundry business is cooling off
Under CEO Pat Gelsinger, who took the helm three years ago, Intel has been trying to upgrade and expand its first-party foundries to catch up to Taiwan Semiconductor Manufacturing (TSMC) in the race to manufacture smaller, denser, and more power-efficient chips. Gelsinger believes that expansion could support the production of its latest CPUs, pull fabless chipmakers away from TSMC, and turn its Intel foundry segment (IFS) into a new growth engine.
Yet, Intel generated just 2% of its revenue from its foundry business in the fourth quarter. Its revenue rose 103% year over year, but declined 6% sequentially and slowed from its 299% year-over-year growth in Q3. By comparison, TSMC's revenue increased 14% sequentially in U.S. dollar terms in its latest quarter.
During the call, Gelsinger claimed Intel could still become the "second-largest external foundry by 2030," but admitted its ambitions wouldn't "materialize overnight." Therefore, it could take a lot longer for this tiny business to move the needle, even though its expansion is essential for the long-term production of Intel's latest CPUs. For now, it will likely operate at much lower margins than its other segments as it upgrades its plants and expands its overall capacity.
3. Its guidance was disappointing
Looking ahead, Intel's guidance broadly missed Wall Street's expectations. For the first quarter of 2024, it expects to generate $12.2 billion-$13.2 billion in revenue, which would represent a sequential decline of 14%-21% and just 4%-13% growth from the year-ago period. Analysts had forecast it to generate $13.6 billion in revenue.
On the bottom line, Intel expects to produce an adjusted profit of $0.13 per share, which would represent an improvement from its adjusted per-share loss of $0.04 a year ago but would broadly miss analysts' projections for adjusted EPS of $0.22.
CFO David Zinsner blamed that disappointing slowdown on "material inventory corrections" for its automotive chipmaker Mobileye and programmable chips, sluggish data center chip sales throughout the first half of the year, and a "significant drop in IFS revenue" as it laps the initial expansion of its foundry business. Zinsner also warned that the "rapid pace" of its foundry expansion would generate "headwinds" for its margins.
4. Its stock isn't cheap enough
For the full year, Intel's revenue and adjusted EPS fell 14% and 37%, respectively. Analysts forecast Intel's revenue and adjusted EPS to rise 12% and 77%, respectively, in 2024, but those estimates might be lowered in response to its first-quarter guidance.
Based on those expectations, the stock still trades at 24 times forward earnings. It might initially look cheaper than AMD and Nvidia, which trade at 47 and 30 times forward earnings, respectively, but Intel arguably faces tougher long-term challenges than those two fabless chipmakers, which both outsource their chips to TSMC.
If Intel's growth remains sluggish over the next few quarters, its share price could drop a lot further before it's considered a value stock. So for now, I'd rather stick with better-run chipmakers instead of betting on Intel's messy turnaround plans.
