Earnings Outlook: Intel has a lot of issues to address beyond earnings

Data-center sales are expected to take another quarterly drubbing Thursday, with analysts forecasting sales of $5.84 billion, an 18% decline from $7.12 billion in the year-ago period. Three months ago, Intel reported a 20% drop in data-center sales, while smaller rival AMD said its data-center sales more than doubled.

Raymond James analyst Chris Caso said he doesn’t “expect July earnings to represent much of a positive or negative catalyst,” but expects data-center sales at Intel to shake off some of their slump going forward.

“While Intel’s data-center business has been mixed in recent quarters amid lower enterprise investment, improving end market demand suggests near-term trends are likely to be favorable through 2H,” said Caso, who downgraded Intel to an underperform rating in April. “Enterprise demand is expected to improve in 2H as spending begins to catch up after a pause over the past year.”

Caso’s fairly positive remarks, however, carried with them a dreaded “that said,” given Intel’s recent announcement of another product delay.

“That said, there are building concerns following the announced Sapphire Rapids delay, which could present headwinds to the data-center business potentially — stalling upgrade demand ahead of the 2022 launch,” Caso said. “Further, we believe the delay also brings risk of accelerated share loss, given the widening technology gap between AMD’s latest Milan platform, set to widen further with the upcoming Genoa launch.”

Back in April, CEO Gelsinger vowed to “fight for every socket” in the crucial data-center market that essentially provides the backbone for the internet. That’s all amid a continuing chip shortage that’s expected to last well into 2022, but which Gelsinger believes will go on much longer.

Just recently, given Intel’s stated intentions to increase fab capacity, reports have circulated that the chip maker is eyeing a possible deal to acquire AMD’s spun-off fab division Globalfoundries Inc. for an estimated $30 billion.

Read: Intel wants to buy AMD’s old chip-making business? How weird are semiconductor mergers going to get?

What to look for

Earnings: Of the 37 analysts surveyed by FactSet, Intel on average is expected to post adjusted earnings of $1.07 a share, which would be down from $1.23 a share reported in the year-ago quarter. Intel forecast $1.05 a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of $1.16 a share.

Revenue: Wall Street expects revenue of $17.81 billion from Intel, according to 30 analysts polled by FactSet. That would be down from the $19.73 billion reported in the year-ago quarter. Intel predicted revenue of Intel forecast revenue of $18.9 billion, or $17.8 billion when removing its divested memory business. Estimize expects revenue of $18.29 billion.

Analysts surveyed by FactSet expect revenue from client-computing, the traditional PC group, to come in at $10.03 billion; nonvolatile memory solutions revenue of $690.8 million; “Internet of Things,” or IoT, revenue of $901.5 million; and Mobileye revenue of $361.4 million.

Stock movement: Intel shares have gained after four of the past seven earnings reports, but has declined in two of the past three, including a 9.3% fall after its first-quarter report.

Intel stock fell 12.3% overall in the second quarter. Over the same period, the Dow Jones Industrial Average
DJIA,
+1.72%
— which counts Intel as a component — rose 4.6%, the S&P 500 index 
SPX,
+1.68%
 rose 8.2%, the tech-heavy Nasdaq Composite Index 
COMP,
+1.80%
 advanced 9.5%, and the PHLX Semiconductor Index 
SOX,
+1.84%
gained 7.1%.

What analysts are saying

Evercore ISI analyst C.J. Muse, who has an in-line rating on the stock, expects a “modest” beat-and-raise quarter from Intel given PC strength and a “budding” recovery in data-center demand, but still maintains a “wait and see approach” on the chip maker.

Muse said there were “a lot of moving parts” in the quarter that needed to be addressed or clarified, namely Intel’s declining gross margins, product cadence given the Sapphire Rapids delay, the recent restructuring of its data-center group, and slowing PC demand.

“We simply find it hard to see shares outperforming given continued uncertainty and the need for execution which will simply take time,” Muse said. “Thus, we continue to take a wait-and-see approach on the name, and reiterate our in-line rating as we await greater clarity and confidence into the company’s [free cash flow] outlook in an IDM 2.0 world.”

In a note titled, “May you live in interesting times,” Bernstein analyst Stacy Rasgon said “Intel is nothing if not interesting these days” as CEO Gelsinger seeks to beef up the company’s foundry capacity with his IDM 2.0 strategy. That, however, is coming at a time when demand for PCs — a major end market for CPUs — appears to be reaching a peak, he said.

For more: The chip crunch marches on, but one sector could be in store for relief

“But before we get excited about the future, a focus on the present may be warranted with PC demand, while still strong, showing signs of peaking, and with CPUs potentially overshooting bringing further risk to numbers next year that we already believe are too high,” Rasgon said. “While datacenter should (hopefully?) rebound cyclically into the 2H, share is coming under increasing pressure, and margins are collapsing; opex is going up, and cash return seems set to markedly decrease.”

Rasgon has an underperform rating and a $43 price target on Intel.

UBS analyst Timothy Arcuri, who has a buy rating on Intel, said the June-ending quarter will “likely [be] weaker than seasonal, but guidance should be strong against a favorable data-center backdrop, even as PC risks into CH2 looked to be baked in.”

Of interest to Arcuri going into the conference call is progress on Intel’s year-ago announced delay of its 7-nanometer chips, as well as more color on the Sapphire Rapids timelines.

Of the 41 analysts who cover Intel, 13 have buy ratings, 17 have hold ratings, and 11 have sell ratings, with an average target price of $64.92, according to FactSet data.