Intel’s Earnings and Steerage Characteristic Extra Good Information Than Unhealthy for Chip Shares

It feels odd to say that an Intel (INTC) earnings report and name that led the CPU large’s inventory to drop greater than 11% contained extra excellent news than dangerous for the chip business, and maybe additionally for PC and server OEMs.

However that is arguably the place we at the moment are, given the extent to which Intel’s top-line woes stem from company-specific points and the way its turnaround efforts embody plans to aggressively dial up capital spending.

To recap, Intel:

  1. Posted combined Q3 outcomes (income missed, whereas EPS beat, although by lower than what the headline quantity suggests after backing out one-time positive factors).
  2. Issued combined This autumn steerage (income steerage is barely above consensus, however EPS is beneath as a result of gross margin pressures).
  3. Reported weaker-than-expected gross sales for its server CPU division (the Information Middle Group, or DCG), and likewise forecast DCG would see “extra modest progress” in This autumn than beforehand anticipated, whereas blaming provide chain points and softer demand from Chinese language cloud giants as a result of regulatory headwinds.
  4. Reported better-than-expected gross sales for its PC CPU division (the Shopper Computing Group, or CCG), but in addition forecast CCG’s gross sales can be roughly flat sequentially in This autumn.
  5. Reported wholesome gross sales progress for its Web of Issues Group (IOTG), Programmable Options Group (PSG) and Mobileye ADAS imaginative and prescient processor unit, due to each good demand and favorable comps.
  6. Guided for 2022 income of “at the least” $74 billion — barely above anticipated 2021 income of $73.5 billion and a consensus of $73.1 billion — whereas including that it is aiming for a ten%-12% income compound annual progress price (CAGR) in subsequent years.
  7. Set a 2022 capex finances of $25 billion to $28 billion, sharply above a 2021 finances of $18 billion to $19 billion, whereas including there’s “potential for additional progress” to capex in subsequent years.
  8. Guided for its non-GAAP gross margin to be in a variety of 51% to 53% over the following 2-3 years — properly beneath a 2020 GM of 59.4% — as a result of excessive capex depreciation bills and enormous investments in new manufacturing processes, earlier than enhancing.

One factor that is price mentioning right here off the bat is that Intel’s This autumn and 2022 top-line steerage (although a bit higher than consensus) implies its gross sales progress will considerably path that of a chip business in the midst of a large upcycle. This autumn gross sales steerage implies a 3% annual income decline, whereas 2022 gross sales steerage implies gross sales will likely be up simply 1% or so, after solely rising 1% in 2021.

Although a portion of Intel’s top-line points could be attributed to Apple’s (AAPL) migration away from Intel modems and PC CPUs in favor of Qualcomm (QCOM) modems and internally designed Mac SoCs, share losses to different purchasers additionally loom giant — notably for DCG, whose 2021 gross sales are forecast by Intel to be down by a low-to-mid single-digit share amid share losses to AMD (AMD) and (more and more) Arm-architecture CPU designs amongst cloud service suppliers.

Intel’s Q3 server CPU division efficiency. Supply: Intel.

Frankly, even when one takes Intel’s feedback about Chinese language cloud pressures at face worth, the 20% Q3 drop seen in DCG’s cloud gross sales is beautiful in gentle of how robust U.S. cloud capex has been. AMD, whose Epyc server CPU gross sales have a powerful cloud skew, has been reporting very robust Epyc progress in current quarters and can probably accomplish that once more when it posts its Q3 report on Oct. 26.

Judging by the expansion charges disclosed by every firm for his or her PC CPU companies, Intel has additionally been ceding some share to AMD within the Home windows PC CPU market. The pending launch of Intel’s Alder Lake desktop and pocket book CPU strains may give the corporate a reprieve in This autumn, however with AMD reportedly prepping a number of PC CPU refreshes in 2022, the reprieve may solely final a few quarters.

Intel’s Q3 PC CPU division efficiency. Supply: Intel.

With all of this in thoughts, what does the read-through from Intel’s report and name appear to be for its friends, prospects and suppliers? I would say that whereas it isn’t completely constructive, there are extra positives than negatives to be discovered.

First, though Intel did report seeing China cloud and enterprise server provide chain headwinds for DCG, it nonetheless reported 70% annual progress for DCG’s enterprise and government-related gross sales. Stock builds and a straightforward annual evaluate helped out right here, however that progress price nonetheless acts as a contemporary signal that enterprise server demand is rebounding properly following a tough, pandemic-impacted 2020.

For the PC business, Intel’s disclosure of a 5% annual drop in pocket book CPU gross sales, along with its outlook for low-end pocket book CPU gross sales to be pressured in This autumn as OEMs prioritize constructing high-end programs amid shortages for choose parts, is yet another signal that the low-end pocket book market is seeing stock corrections as a result of a combo of part shortages and softer shopper/training demand.

However on the flip facet, the 20% desktop CPU gross sales enhance reported by Intel is an encouraging signal for a way company PC demand is trending. And with a number of high-end PC demand nonetheless unmet proper now, Intel forecast the whole addressable market (TAM) for PCs will develop once more in 2022.

In the meantime, the 54%, 16% and 39% progress charges reported by IOTG, PSG and Mobileye are constructive indicators for chip demand inside end-markets comparable to edge servers, cellular infrastructure and ADAS. PSG’s efficiency, which Intel suggests would have been even stronger if not for main provide constraints, probably has some constructive read-through for archrival Xilinx (XLNX) , which is ready to be acquired by AMD.

Final however actually not least, chip gear makers need to be very happy with Intel’s 2022 capex steerage, which in keeping with Bernstein analyst Stacy Rasgon is web of any authorities subsidies Intel will obtain. Along with aggressive spending plans from foundry large Taiwan Semiconductor  (TSM) , reminiscence makers and varied suppliers of chips made utilizing trailing-edge and specialty manufacturing processes, Intel’s outlook suggests wafer fab gear (WFE) spend will likely be up strongly for the second yr in a row in 2022.

Whereas there’s understandably a number of skepticism on Wall Avenue about Intel’s skill to attain the long-term CAGR goal it set on Thursday — Rasgon, who has had an “Underperform” score on Intel for greater than a yr, went so far as to name the goal “outlandish” — there is no questioning CEO Pat Gelsinger’s willingness to spend aggressively (and depress near-term margins/income within the course of) to attempt to put his firm’s CPU franchises on higher long-term footing in opposition to AMD and Arm-architecture rivals, in addition to to develop Intel’s nascent foundry enterprise.

Between them, Intel’s gross sales, demand and spending disclosures clarify why the shares of AMD, a number of main chip gear makers and prime Intel OEM consumer Dell Applied sciences (DELL) closed increased on Friday, at the same time as Intel fell 11.7% and the Nasdaq fell 0.8%. Although markets now have a greater appreciation of the monumental near-term challenges Gelsinger inherited when he grew to become CEO in February, in addition they perceive that near-term circumstances look a lot brighter for a lot of different chip business names.

(Apple and AMD are holdings within the Motion Alerts PLUS member membership. Wish to be alerted earlier than AAP buys or sells these shares? Study extra now.)

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