Intel
INTC
Q1 2023 results saw a sharp decline versus last year, although they came in better than market expectations. Sales declined by about 36% year-over-year to $11.7 billion as both the company’s Data Center and PC businesses faced headwinds. The company also swung to a net loss of $2.8 billion, or $0.66 per share compared to a net profit of $8.1 billion in the year-ago quarter. However, the company’s outlook for Q2 was slightly better than expected, with sales projected to come in at between $11.5 billion to $12.5 billion, marking a decline of about 21% at the mid-point versus the last year.
The PC industry is currently in a slump, as the tailwinds seen through Covid-19 have eased. Global PC shipments dropped nearly 30% in the first quarter per market tracking firm IDC. This caused revenues for Intel’s Client Computing group to decline 38% to $5.8 billion. Moreover, vendors have also been working through inventory that they built up last year and this has also hurt Intel’s sales.
Intel’s Data Center and AI business also saw revenue fall by 39% versus last year to $3.7 billion, as demand from the cloud computing and enterprise space remains weak. Intel has also been losing share to rival AMD whose Genoa server chips offer a better price-to-performance tradeoff versus Intel’s current server processors. While the market headwinds could persist in the near term, Intel could benefit from the launch of its new data-center-focused chips. The company indicated that the new Sierra Forest chip would start shipping in the first half of this year with the Granite Rapids chip slated to debut shortly after.
Gross margins have also trended sharply lower to 34.2% from about 50% in the year-ago quarter due to weaker revenues and the company’s investments in process improvements. Things are expected to remain tough over Q2 as well on the margins front, with the company guiding for adjusted gross margins of 37.5%.
We remain neutral on Intel stock at current levels of around $31. Although the company has indicated that the PC market was showing signs of stabilizing, Intel’s heavy investments are likely to weigh on the stock. The company is looking to play a bigger role as a foundry, producing chips for other semiconductor companies, and taking on the likes of TSMC and Samsung Electronics. It remains to be seen whether this capital-intensive bet will pay off, especially considering Intel’s recent struggles with updating its chips to the latest process nodes. Intel’s valuation also isn’t exactly attractive. The company trades at about 18x consensus 2024 earnings, which is a relatively rich valuation given the multiple uncertainties Intel faces. We value Intel stock at about $30.50 per share, which is roughly in line with the current market price. See our analysis of Intel Valuation for more details on what’s driving our price estimate for Intel.
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