Intel’s Weak Outlook: Analysts Recommend Selling

Lower PC demand is hurting Intel’s future profit margin, several analysts warn investors.

Intel faces more headwinds as analysts predict more slowdowns for the semiconductor company.

The chipmaker reported weaker-than-expected fourth quarter earnings and said lingering weakness in PC demand would pressure margins and clip near-term profits over the coming months.

Shares of Intel fell by 42% during the past year as investors grew wary of the company’s growth prospects. 

Intel’s adjusted bottom line for the December quarter was pegged at a 10 cents per share, while the Street had forecast a 20 cents per share profit. Revenue were also light at $14 billion, compared to a Street forecast of $14.5 billion, while gross margins fell to 43.8%.

Analysts: Negative, Sell Outlook

Losses at Intel could extend into 2024 as the company seeks to recoup its losses and gain more customers that were lost to Advanced Micro Devices  (AMD) – Get Free Report, wrote ratings company S&P, which downgraded the company to ‘A’ with a negative outlook. 

Intel’s profitability has been impacted by “negative macroeconomic trends .. adding to already challenged business prospects. We expect weaker-than-anticipated PC and server chip demand in 2023 and continued market share loss to .. $AMD .. could persist through 2024.”

A weaker economy will persist as companies cut back on their spending and has resulted in a “severe CPU inventory correction in PCs and servers are expected to adversely impact processor volumes and profitability,” wrote Toshiya Hari, a Goldman Sachs analyst, in a Jan. 27 research note.

The outlook for Intel remains weak as there remains competitive headwinds in the server CPU division, “investments in technology development that are necessary, though not necessarily sufficient, for Intel to regain technology/product leadership, and higher unit costs (as the company transitions to newer process nodes) weighing on margins, earnings, and free cash flow in the near-to medium-term,” he wrote.

Forecasts for Intel’s revenue were cut by 5% on average, wrote Hari, who maintains a sell rating with an unchanged price target of $24.

Lackluster sales of PCs and enterprise spending for equipment is a major factor impeding Intel’s profit margins, Hari wrote.

“Persistent weakness in end consumption could prolong the inventory correction and disappoint the cautiously optimistic consensus view (i.e. 2H recovery) that appears to be forming in the market,” he said.

Since profit margins are low and capital spending is still elevated, Intel’s free cash flow “remains under pressure,” Hari said. “While capital offsets are likely to grow in 2024, we model negative FCF in 1H23 and only near-break-even in 2H23.”

Economic Slowdown Hurt Margins

A slowdown in the economy impacted the amount of revenue generated.

“We stumbled … we lost share … we lost momentum,” Intel CEO Pat Gelsinger told investors on a conference call. “We think that stabilizes this (and) we’re going to be building a road map that allows us to regain leadership for the long term in this critical market.” 

Client computing revenue fell 36% from last year to $6.6 billion, Intel said, with little overall support from its data center and AI division, where sales fell 33% to $4.3 billion. Network and Edge Group sales were down 1% to $2.1 billion.

Intel said it sees revenues slowing further to between $10.5 and $11.5 billion over the current quarter

Gross margins for the three months ending in March are now expected to narrow to around 34.1%, nearly half of the chipmaker’s long-term target of around 60%.

With weak PC demand expected to last well into the first half of the year, and data center clients pulling back on spending plans amid broader macro uncertainty, Intel expects a March quarter loss of 15 cents per share. 

“We’re confident in the strategic outlook that we have for our business, although the macro is difficult,” Gelsinger added. “We expect it to remain difficult as we go through the first half of the year, but we’re laser-focused on controlling the things that we can and every aspect of our execution, cost management and transformation is in our hands and we are well underway in executing against those paths.”

“While no full-year guidance was provided, Intel sees the first half correction will be followed by a second half recovery,” said KeyBanc Capital Markets analyst John Vinh, who lowered his near-term profit estimates but held onto his ‘sector weight’ rating for Intel stock.

“We expect 2023 will be another challenging year with limited catalysts,” he added.

Intel’s delayed next generation ‘Sapphire Rapids’ chip is expected to ramp production in 2023, but will likely still find it difficult to challenge Advanced Micro Devices’ new ‘Genoa’ data center chip which CEO Lisa Su said will translate into “lower capex, lower opex and lower total cos of ownership” for enterprises and for cloud data centers.

“Intel had high hopes that Sapphire Rapids would enable them to take the fight to AMD and regain some footing within the Data Centers,” said Lucas Keh, a semiconductor analyst at Third Bridge.

“However, our experts say that it has been a disappointment so far because of Intel’s continuous inconsistency in delivery,” he said. “They had to remove features in order to finally deliver Sapphire Rapids in a reasonable timeframe to the public amidst the delays.”

delivery
devices