Intel shares plunge after Q3 data center sales disappoint
23 October 2020
After several quarters of far-better-than-expected results, Intel
(not in our portfolios) finally reported declining revenues and weak Q4 forecast. The announcement was ill received by the market and shares are plunging >10%. Intel is transforming to address the largest market opportunity in its history, confirming our views on the AI & Robotics space.
Bottom line:
Intel’s Q3 results and guidance confirm the dynamic of data-centric markets and the growing competition. We believe it validates our views on the evolution of datacenter architectures towards more accelerated computing and less central processing, that favors Intel’s competitors (AMD, Nvidia and Xilinx – part of our portfolios).
In our view, Intel will outsource some of its core product manufacturing (microprocessors) and most of its adjacent products (networking, edge computing, artificial intelligence) to TSMC. Considering Intel’s management focus on returning cash to shareholders rather than increasing capital expenditures, it is likely that such a move could happen sooner than later.
What happened?
Intel (INTC US) reported in-line 3Q results overall with $18.3bn in revenue ($1.11 earnings per share). For the full year, Intel sees revenue of $75.3bn vs. $75bn prior guidance and a $75.16bn consensus. Yet, the market was likely taken aback by Data Center Group’s (DCG) revenues being way below consensus. Even worse, the forecast for Q4 implies another ~25% decline for Intel’s data-centric business.
During its call, Intel’s management commented on continuous weakness in its data center business as being a story of two tales with solid market traction, but a product mix driven towards lower average selling prices (ASPs). We believe it confirms our recent comments about the strength of competitors and the evolution of datacenter architectures towards more accelerated computing and less central processing (2020-09-23 and 2020-10-07 Investment Recipes).
Intel’s transformation to continue till 2023 - on either Intel 7nm or external foundry or mix of both
Intel reiterated its diversified growth strategy fueled by data and the rise of artificial intelligence, 5G network transformation and the intelligent autonomous edge - the largest market opportunity in Intel’s history as per intel’s CEO. The traction of these markets is confirmed by the strong DCG adjacencies’ 34% year-over-year growth and the programmable solutions’ cloud segment growing 43%.
We agree with Intel’s views, as they reflect our strong convictions in the AI & Robotics portfolio since its launch in 2015. We also believe that competitors (mainly AMD, Xilinx and Nvidia, part of our portfolios) are better positioned to take advantage of these market drivers, while Intel needs to go through a transformation cycle first as they have some catch up to do on both integrating technologies and fabs.
Additionally, Intel confirmed it is actively considering options for core manufacturing operations. In our view, it is both a consequence of the increased breadth of Intel’s portfolio and of the delays that plagued Intel’s silicon technology leadership.
Intel shared it is evaluating its silicon process versus other third-parties on schedule predictability, product performance and economics – and expects to lay out a decision before January.
Considering the on-going large share buyback plans, increased dividend and reduced forecasted capital spending (e.g. the NAND memory business sale announced this week), we believe that Intel is not trying to push an in-house development and view TSMC as the partner of choice (quoting Intel’s CEO: ‘we feel very confident in the ability of us being able to port to TSMC’).
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