Intel (INTC +11.04%) stock recently got hit with a major pullback. The company posted its fourth-quarter results on Jan. 22 and delivered sales and earnings that came in ahead of the market's expectations. The semiconductor player posted non-GAAP (generally accepted accounting principles) adjusted earnings of $0.15 per share on sales of $13.7 billion, beating the average analyst forecast for per-share earnings of $0.08 on sales of $13.4 billion.
On the other hand, the company's forward guidance came in below Wall Street's expectations. The company guided for first-quarter sales to come in between $11.7 billion and $12.7 billion, with the midpoint of that guidance range falling short of the average analyst estimate's call for sales of $12.51 billion. Meanwhile, management's forecast for a break-even quarter missed Wall Street's target for adjusted earnings per share of $0.05.
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Despite the big pullback, Intel stock is still up 111% over the last year. What comes next for the semiconductor company, and what do investors need to be watching out for?
AI sales and the foundry business take center stage
Intel's data center and artificial intelligence (AI) segment grew sales 8.9% year over year to hit $4.7 billion in the fourth quarter. The performance came in significantly better than the $4.43 billion in sales called for by the average analyst estimate, and the company said that sales would have been even higher were it not for supply issues.
The company is shifting production at its fabs to meet demand for its new server chips, but the transition is taking some time -- and this dynamic partially explains the underwhelming Q1 guidance. Management expects factory output along those lines to improve in each subsequent quarter this year.
Intel has started shipping chips manufactured on its 18A process and says development for its next-gen 14A process remains on track. On the other hand, the foundry business continues to be a big money loser. The segment posted a $10.3 billion operating loss last year, and adoption among third-party customers remains relatively low. Sales to third-party customers came in $222 million last quarter.
NASDAQ: INTC
Key Data Points
Intel expects that revenue for its foundry business will be up double digits on a sequential quarterly basis in Q1, but the market clearly had a negative reaction to the outlook on the manufacturing front. After posting an adjusted gross margin of 37.9% in Q4, the company is targeting a margin of 34.5% in the current quarter.
If the gross margin decline stems in part from a greater product mix tied to the 18A process, that could suggest that the foundry platform's manufacturing yields have underwhelming efficiency. With that in mind, Intel could be looking at softer margins for chips made on the process and relatively weak demand from third-party customers.
When the company delivers its next earnings report, forward guidance for sales and gross margins should provide some meaningful indicators on whether 18A can play a bigger role in powering the business's turnaround, or if investors will have to shift their hopes to the upcoming 14A process.
