Share prices of Intel (INTC -2.07%) fell 11% after the company released fourth-quarter 2023 results on Jan. 25. Wall Street wasn't satisfied with its guidance for the current quarter, which turned out to be significantly below expectations.
Even though Chipzilla's revenue and earnings beat consensus estimates, the market was anticipating much stronger growth in the current quarter on account of a turnaround in the personal computer (PC) market and Intel's growing influence in artificial intelligence (AI) chips.
Let's take a closer look at Intel's quarterly performance and see if Intel's pullback is an opportunity to buy more shares or presents a red flag for investors.
Intel returns to growth, but Wall Street isn't satisfied
Intel's Q4 revenue increased 10% year over year to $15.4 billion, while non-GAAP earnings shot up an impressive 260% year over year to $0.54 per share. This brought an end to eight successive quarters of earnings declines.
Wall Street would have settled for $0.45 per share in earnings on revenue of $15.16 billion, but Intel outperformed expectations thanks to robust growth in its PC-focused client computing group (CCG). Intel's CCG revenue shot up an impressive 33% over the prior-year period to $8.8 billion, accounting for 57% of its top line.
CFO David Zinsner remarked on the company's latest earnings conference call, "We saw sustained strength in gaming and commercial segments, along with record performance of notebook shipments in the quarter."
Zinsner further added that inventory levels in the PC market have normalized. Intel is anticipating the PC market to clock low-single-digit growth this year, which would be a nice improvement following last year's decline of 12.4%. However, not all of Intel's businesses are in good shape. The data center and AI segment, for instance, witnessed a 10% year-over-year decline in revenue to $4 billion. The networking business saw a steeper year-over-year decline of 24% to $1.5 billion.
So, Intel isn't firing on all cylinders just yet, and this probably explains why its guidance didn't pass muster. The semiconductor giant expects its revenue in the first quarter of 2024 to land at $12.7 billion at the midpoint of its guidance range. That points toward a year-over-year jump of 8.5%. However, Wall Street was expecting a bigger increase to $14.2 billion, which means Intel missed the estimate by a big margin.
Meanwhile, Intel management anticipates adjusted earnings of $0.13 per share this quarter. While that's a big leap over the year-ago period's loss of $0.04 per share, the consensus expectation of $0.34 per share tells us that analysts were looking for a much stronger jump. So, Intel's post-earnings sell-off seems justified at first considering that it missed Wall Street's expectations by a big margin. However, a closer look indicates that its pullback presents a buying opportunity for savvy investors.
Don't miss these silver linings
Intel's muted outlook is the result of inventory corrections in the Mobileye business and a drop in revenue from the foundry services segment. However, the company is on track to deliver overall growth once again this quarter, and investors shouldn't miss the fact that Intel is sitting on a couple of solid catalysts that could allow it to gain momentum as the year progresses.
For instance, Intel expects to make a big dent in the market for AI-enabled PCs in 2024. The company points out that its processors will power more than 230 AI-enabled PCs and handheld gaming devices from multiple OEMs (original equipment manufacturers) such as Asus, Acer, Dell, Lenovo, HP, MSI, and others. In all, Intel estimates that it is on track to ship 40 million AI PCs in 2024.
That's a big number considering that market research firm Canalys expects 1-in-5 PCs shipped this year will be AI-enabled. As total PC shipments are anticipated to hit 267 million units in 2024, according to Canalys, the number of AI-powered PCs could land at just over 53 million units. Intel's shipment estimate suggests that it is on track to capture a lion's share of this nascent market, which is expected to become big in the long run.
By 2027, Canalys estimates that 60% of the PCs shipped will have AI functionality. This could pave the way for solid growth in Intel's CCG business and allow the company to keep growing at a nice pace in the long run.
Meanwhile, Intel's data center and AI business is also gaining traction. Though the segment's revenue was down 10% year over year in the previous quarter, it was a big improvement over the 39% year-over-year decline witnessed in the same period last year. This business should keep getting better thanks to Intel's growing pipeline of AI customers.
Company management said on the earnings call that the revenue pipeline of its Gaudi family of AI accelerators is "now well above $2 billion and growing." What's more, a third of the demand for Intel's fourth-generation server processors is coming from AI-related applications. Given that Intel's new fifth-generation Xeon processors are expected to carry 42% higher AI inference performance, the demand for its server processors could continue increasing.
All these catalysts indicate that Intel's growth could indeed pick up pace in 2024 and beyond. Investors should consider taking advantage of the pullback in Intel as this semiconductor stock could eventually regain its mojo and head higher.
