If there were a trifecta for terrible earnings reports, Intel (INTC +3.56%) would have just won it.
The blue chip tech stock missed estimates in its second-quarter earnings report, offered guidance below expectations, eliminated its dividend, and announced a round of layoffs and cost cuts.
Any of those news items on its own would have been enough to send the stock spiraling, but all four at once show a company in utter disarray, one that can't meet its own forecasts, maintain cash flow to return to investors, or allocate internal resources effectively.
Not surprisingly, Intel stock plunged on the news, closing down 26% on Friday. Shares are now at their lowest point in over a decade.
There were already red flags visible in Intel's business as the company had slashed its dividend previously, missed guidance, and seemed to be behind in the AI race. However, the second-quarter update makes it clear that the company is fundamentally broken. Dip-buyers may be thinking of buying the stock, but Intel could easily move even lower, and a number of events could spur just that.
Image source: Getty Images.
1. 2030 guidance should get pulled
CEO Pat Gelsinger has staked the company's future on Intel Foundry, the company's chip manufacturing business, and artificial intelligence through new products like its Gaudi 3 accelerator.
Earlier this year, when the company restructured to break out Intel Foundry as its own operating segment, Intel gave long-term guidance indicating a path to bumper profits. Intel said losses would peak in the foundry business this year, achieve break-even operating margins by 2027, and reach 30% adjusted operating margins by 2030. It also said it was targeting a 40% adjusted operating margin in its products business by 2030.
At the time, those seemed like distant and lofty goals, but now they seem like little more than pie in the sky. In its second-quarter report, Intel badly missed its own gross margin guidance of 40.2%, posting a result of 35.4%. The company blamed the miss on an accelerated ramp in its AI PC product, higher-than-expected charges to non-core business, and headwinds from unused capacity.
Companies do miss guidance, but missing by five percentage points is significant. It indicates both management's inability to forecast the business and the volatility inherent in a high-tech, cyclical industry.
Intel can't control competitive behavior, customer demand, new technologies, the business cycle, or regulations like recent U.S. chip export restrictions to China. It's foolish to think the company can plot a steady path to margin improvement over the next six years and get there as expected. After Thursday's news, that guidance seems likely to be pulled at some point, and that's likely to push the stock lower. It's only a question of when.
2. Removal from the Dow could be around the corner
Intel has been hanging on to its membership card in the Dow Jones Industrial Average (^DJI +0.19%), but its position in the elite blue chip index made up of just 30 stocks seems increasingly hard to justify.
Intel trades at a price just north of $20 a share, meaning its impact on the price-weighted index is almost nothing. The next-lowest price on the Dow is Verizon at $41 a share.
Among the Dow's criteria for inclusion on the index are the company's reputation, history of sustained growth, interest to investors, and sector representation of the broader market. With chip stocks in vogue right now, the Dow can find much better and more successful representations of the industry than Intel. Nvidia and Broadcom have both split their stocks recently, making them eligible for Dow membership, and even swapping Intel for AMD would make sense.
Leaving the Dow wouldn't affect Intel's business, but it would further damage its reputation with investors and serve as yet another reminder of the company's long fall from grace.
3. Recruiting just got even harder
Imagine working in Silicon Valley for the last 20 years and holding company stock that returned nothing in those 20 years. Intel engineers don't have to imagine it. They lived it.
Morale is likely at an all-time low at the company right now. On top of laying off 15% of its workforce, Intel is spinning its wheels at a time when chip stocks have added trillions of dollars in value as they ride the AI boom. Just across town in Santa Clara, Nvidia employees are swimming through a data center of gold coins, but Intel can't keep up with the Joneses.
It's a harsh reality inside Intel at the moment, and it could lead to an exodus of employees and make recruiting that much more difficult. Ultimately, a company like Intel is only as strong as the people doing the work, and recruiting top talent is necessary for it to thrive.
That just got significantly harder after Thursday's layoffs, the cost cuts, and the plunge in the stock.
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Key Data Points
Can Intel recover?
It's possible that the company will one day land on its feet, but Intel stock deserves to be in the penalty box after such a long period of underperformance. The sell-off could attract bargain hunters, but it's likely to take years for management to fundamentally turn around the business.
For now, investors are better off doing something that's been a winning approach for the last decade -- looking elsewhere in the chip sector.
