Shares of chipmaker Intel (INTC +0.13%) fell sharply in after-hours trading on Thursday after the company reported earnings and issued disappointing first-quarter guidance.
The move comes after Intel's stock has soared recently, setting a high bar going into the report.
Unfortunately, the company didn't meet this bar when it reported its fourth-quarter results. In fact, Intel's own outlook made the near-term issue hard to miss: supply. In its update on Thursday, management specifically called out supply challenges it expects in Q1, noting that supply shortages will negatively impact results.
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Supply pinches the outlook
Intel reported fourth-quarter revenue of $13.7 billion, down 4% year over year, and it posted non-generally accepted accounting principles (GAAP) earnings per share of $0.15, up 15% year over year. For the full year, revenue was $52.9 billion and essentially flat year over year. These figures exceeded management's guidance even as Intel navigated supply shortages during the quarter.
But there's a glaring problem.
"We expect our available supply to be at its lowest level in Q1 before improving in Q2 and beyond," said chief financial officer David Zinsner in the company's fourth-quarter earnings release.
Reflecting these constraints, Intel guided for first-quarter revenue to be between $11.7 billion and $12.7 billion. The midpoint is about 11% below fourth-quarter revenue. And the company expects non-GAAP earnings per share of $0.00 for the quarter.
Of course, the weakness is not coming from demand.
Zinsner said demand fundamentals across Intel's core markets remain healthy, while pointing to supply as the constraint and tying ongoing AI (artificial intelligence) adoption to the importance of its x86 ecosystem.
You can also see evidence of robust demand for AI-related products in the company's results. Intel's fourth-quarter data center and AI revenue rose 9% year over year to $4.7 billion.
Intel's recent results, along with its guidance, tell a clear story: Demand for the company's products -- particularly its AI products -- is impressive. But how the company performs will boil down to a combination of industrywide supply shortages easing and strong execution in production and manufacturing.
The valuation is too high
With a market capitalization of about $230 billion after the stock's big pullback in after-hours trading on Thursday, shares are arguably still expensive. That's a demanding valuation for a company that not only isn't profitable on a GAAP basis but also expects a significant sequential decline in sales in Q1.
Another way to look at the valuation is on a price-to-sales basis. Shares currently trade at a price-to-sales ratio of more than 4. This pales in comparison to the price-to-sales multiples of some chip companies like Nvidia and Broadcom -- at 24 and 25, respectively. And it's half of the price-to-sales ratios of some slower-growing chip companies like Texas Instruments. But these are highly profitable businesses. In addition, Intel's price-to-sales ratio is still high enough to imply that investors expect significant profitability at some point.
Clearly, the market expects improved supply and continued robust demand growth. But that's exactly the problem: the market is already pricing this in.
On the flipside, there's good reason to be bullish. Management has specifically said that it expects supply to begin improving "in Q2 and beyond." In addition, management has visibility into demand, which it says remains healthy.
But the risk is that the same execution issues that have frustrated investors for years potentially resurface during the product ramp itself.
At some point, it might make sense to buy the dip in Intel stock. But I don't believe the risk-to-reward value proposition is attractive enough at this price -- at least not given the company's underwhelming results and its potentially drawn-out production ramp as it navigates industrywide supply shortages. Given the stock's demanding valuation, and with the knowledge that supply will be particularly constrained in Q1, waiting for either a bigger pullback or more evidence that execution is improving seems like the best approach for now.
