Understanding the Bearish Signals in This Chipmaker's Stock Chart

Intel Corporation’s (INTC) shares plunged nearly 31% in April, marking their worst month in more than two decades, as the prominent chipmaker continues to grapple with executing a turnaround. Moreover, the stock has dropped approximately 40% year-to-date.

Most of INTC’s sell-off occurred after its recent financial results, which included a bleak forecast, indicating that the company’s turnaround efforts will require more time and investment. Further, Intel’s factory operations faced challenges in March, adding to investor concerns.

Mixed First-Quarter Earnings and Weak Forecast

During the first quarter that ended March 30, 2024, INTC’s net revenue increased 8.6% year-over-year to $12.72 billion. However, that missed analysts’ estimate of $12.78 billion. Also, the company’s Foundry business reported $4.40 billion in revenue, down 10% year-over-year.

The chipmaker’s gross margin rose 30.2% from the prior year’s quarter to $5.22 billion. Its operating loss was $1.07 billion, compared to $1.47 billion in the previous year’s period. However, Intel Foundry posted a $2.50 billion operating loss during the quarter. In 2023, this unit reported a hefty operating loss of $7 billion.

Furthermore, INTC’s net income came in at $437 million versus $2.77 billion in the same quarter of 2023. Also, the loss per share attributable to Intel was $0.09, compared to $0.66 in the prior year’s quarter. That surpassed the consensus loss per share estimate of $0.15.

Intel’s primary business remains manufacturing chips for PCs and laptops, categorized as Client Computing Group (CCG). This business unit revenue amounted to $7.50 billion, a 31% increase year-over-year.

In addition, Intel produces central processors for servers and other components and software, which are classified under its Data Center and AI business segment. Sales in this segment rose by 5% year-over-year to $3 billion. However, the chipmaker faces stiff competition in the server market, particularly against AI chips from companies like NVIDIA Corporation (NVDA).

In addition, for the second quarter of fiscal 2024, the company expects its revenue to come between $12.5 billion and $13.5 billion. It projects a loss per share of $0.05 for the current quarter, and its non-GAAP earnings per share are expected to be $0.10.

INTC recently revised its current-quarter revenue guidance after the U.S. Department of Commerce revoked certain export licenses intended to send its chips to the Chinese tech company Huawei.

On May 7, the chipmaker said in an 8-K filing with the SEC that it had received a notification from federal regulators that they were “revoking certain licenses for exports of consumer-related items to a customer in China, effective immediately.”

On Wednesday, Intel announced that due to the Commerce Department's directive, it expects revenue for the second quarter to fall below the midpoint of the original range of $12.5 billion to $13.5 billion. However, the company continues to expect full-year revenue and earnings to be higher than in 2023.

Intel Faces Fierce Competition

INTC, a longstanding leader in the semiconductor industry, has been facing rigid competition from rivals, including Advanced Micro Devices, Inc. (AMD) and Nvidia. Intel remains dominant in the PC chip market, but AMD is gaining ground in server, desktop, and mobile segments, as per the latest figures from Mercury Research.

Intel remains the leading player in the server CPU segment, with a market share of 79.2% during the first quarter; however, this is down from 82% in the year-ago quarter, indicating some erosion in its market share. On the other hand, AMD made gains in this segment, rising from just 18% a year ago to 23.6% in the first quarter of 2024.

Also, Intel's market share in the mobile CPU segment was 80.7% in the first quarter of 2024, compared to 83.8% in the prior year’s quarter. However, AMD’s 19.3% market share in the first quarter was 3.1% up from the same period in 2023. Further, AMD gained on Intel, with its 23.9% desktop share in the fiscal 2024 first quarter, up 4.7% a year ago.

Besides, INTC continues to fight for server market share against competitor NVDA, particularly in AI chips. Nvidia commands around 80% of the AI chip market with its graphics processors (GPUs), which AI builders have favored over the past year.

Earlier in April, Intel introduced its latest AI chip, Gaudi 3, as competition from NVDA intensified. The company claimed the new Gaudi 3 chip is over twice as power-efficient and can run AI models 1.5 times faster than Nvidia’s H100 GPU. Also, it is available in various configurations, such as a bundle of eight Gaudi 3 chips on a single motherboard or a card designed to fit into existing systems.

Intel tested the chip on models like Meta's open-source Llama and Falcon, backed by Abu Dhabi. It highlighted that Gaudi 3 could be instrumental in training or deploying models, including Stable Diffusion and OpenAI’s Whisper model for speech recognition.

Also, Intel is losing market share to rivals such as Arm Holdings PLC (ARM), Samsung Electronics, and Taiwan Semiconductor Manufacturing Ltd. (TSM).

Analysts Lowered Price Targets for Intel Shares

Goldman Sachs analysts slashed their price target for INTC stock from $39 to $34 and lowered their adjusted EPS estimates for the 2024-2026 period by an average of 18%. Also, they reaffirmed their “Sell” rating for the stock, which has been in effect since July 2020.

“We worry the company will continue to cede wallet share within the overall Data Center Compute market to the likes of Nvidia and Arm,” Goldman analysts said.

Meanwhile, Bank of America Corporation (BAC) cut its price objective to $40 from $44, citing higher costs, lower growth, and fierce competition. According to BofA analysts, the bleak second-quarter revenue guidance highlights that “topline growth remains lukewarm on limited AI exposure, while underutilized manufacturing and elevated costs.”

They added that Intel’s “enterprise incumbency, US-based manufacturing assets and weak investor sentiment provide turnaround potential.”

Bottom Line

INTC’s first-quarter 2024 earnings surpassed Wall Street’s expectations for EPS but fell short on sales. The chipmaker also provided a weak forecast for the current quarter.

After the U.S. Department of Commerce recently revoked certain licenses for exports of chips to Huawei in a bid to curb China’s tech power, Intel revised its second-quarter revenue guidance, anticipating below the initial range of $12.5 billion to $13.5 billion.

INTC’s stock fell more than 30% in April, making its biggest decline since June 2002. Moreover, the stock is trading below its 50-day and 200-day moving averages of $38.33 and $39.74, respectively, indicating a downtrend.

Despite INTC’s more than 50 years of dominance in the semiconductor industry, it now faces intense competition from competitors like AMD, NVDA, TSM, Samsung, ARM, and more. Also, the ongoing AI boom has caused a shift in enterprise spending away from Intel’s traditional data center chips.

With limited AI exposure, the intensifying competition raises doubts about Intel’s future dominance in the semiconductor industry.

INTC’s CEO Pat Gelsinger told investors on an earnings call to focus on the company’s long-term potential.

Analysts expect INTC’s revenue to increase marginally year-over-year to $13.06 billion for the second quarter ending June 2024. However, its EPS for the current quarter is expected to decline 18.2% year-over-year to $0.11. For the fiscal year 2024, the chipmaker’s revenue and EPS are expected to grow 3.3% and 4.8% year-over-year to $55.99 billion and $1.10, respectively.

“While 2024 should mark a bottom in many aspects of the business, the pace of the climb back up is unlikely to remain unclear,” Stifel stated in a note to clients.

Given INTC’s disappointing revenue guidance, regulatory issues, and fierce competition, it could be wise to avoid investing in this stock now.

Is Intel (INTC) a Buy, Sell, or Hold Amidst Tough Competition?

Intel Corporation (INTC), a prominent semiconductor company, is currently navigating a challenging phase characterized by a dwindling financial outlook and difficulties sustaining competitiveness within the semiconductor industry. Intel stands behind many tech stocks in the S&P 500 this year, while rival chipmaker NVIDIA Corporation (NVDA) emerges as the third-best performer in the index.

Now, we will evaluate the risks and opportunities associated with investing in Intel amidst competitive pressures.

Strategic Initiatives to Keep up With the Fierce Competition

Amid escalating competition in the tech arena, INTC, the foremost producer of processors driving PCs and laptops, has aggressively expanded its presence in the AI domain to remain abreast of its peers.

Last month, the company announced the creation of the world's largest neuromorphic system, dubbed Hala Point, which is powered by Intel's Loihi 2 processor. Initially deployed at Sandia National Laboratories, this system supports research for future brain-inspired AI and addresses challenges concerning AI efficiency and sustainability.

On April 9, Intel also unveiled a new AI chip called Gaudi 3, which was intended to compete against NVDA’s dominance in popular graphics processing units. The new chip boasts over twice the power efficiency and can run AI models one-and-a-half times faster than NVDA’s H100 GPU. The company expects more than $500 million in sales from its Gaudi 3 chips in the year's second half.

In March, Reuters reported that INTC plans to spend $100 billion across four U.S. states to build and expand factories, bolstered by $19.5 billion in federal grants and loans (with an additional $25 billion in tax incentives in sight). CEO Pat Gelsinger envisions transforming vacant land near Columbus, Ohio, into "the largest AI chip manufacturing site globally" by 2027, forming the cornerstone of Intel's ambitious five-year spending plan.

Such advancements enable the company to stay competitive and meet the growing demand for AI-driven solutions across various industries.

Solid First-Quarter Performance but Shaky Outlook

For the first quarter that ended March 30, 2024, INTC’s net revenue surged 8.6% year-over-year to $12.72 billion, primarily driven by growth in its personal computing, data center, and AI business. However, its revenue from the Foundry unit amounted to $4.40 billion, down about 10% year-over-year.

Intel’s gross margin grew 30.2% from the prior year’s quarter to $5.22 billion. Also, it reported a non-GAAP operating income of $723 million, compared to an operating loss of $294 million in 2023. Further, its non-GAAP net income and non-GAAP earnings per share came in at $759 million and $0.18 versus a net loss and loss per share of $169 million and $0.04, respectively, in the same quarter last year.

The solid financial performance underscores the vital innovation across its client, edge, and data center portfolios, driving double-digit product revenue growth. Total Intel Products chalked up $11.90 billion in revenue for the first quarter of 2024, resulting in a 17% year-over-year increase over the prior year’s period. Its Client Computing Group (CCG) contributed to about 31% of the gains of this unit.

However, the company lowered its outlook for the second quarter of 2024. The company expects its revenue to come between $12.5 billion and $13.5 billion, while its non-GAAP earnings per share is expected to be $0.10.

Following the company's weak guidance for the ongoing quarter, Intel shares nosedived as much as 13% on Friday morning, overshadowing its first-quarter earnings beat. Also, the stock has plunged nearly 15% over the past six months and more than 39% year-to-date.

Bottom Line

INTC surpassed analyst estimates on the top and bottom lines in the first quarter of 2024, but achieving full recovery appears challenging. The chipmaker provided a weak outlook for the second quarter, validating concerns about its ongoing struggle to capitalize on the AI boom amid competition pressures.

Looking ahead, analysts expect INTC’s revenue to increase marginally year-over-year to $13.09 billion for the quarter ending June 2024. However, the company’s EPS for the current quarter is expected to fall 16.2% from the prior year’s period to $0.11.

For the fiscal year 2024, the consensus revenue and EPS estimates of $56.06 billion and $1.10 indicate increases of 3.4% and 5.2% year-over-year, respectively.

Recently, Goldman Sachs analysts slashed their price target for Intel stock by $5 to $34 per share and reaffirmed a ‘Sell’ rating in light of heightened competition in the artificial intelligence landscape.

Toshiya Hari noted that the company’s weak guidance was due to delayed recovery in traditional server demand, driven by cloud and enterprise customers' focus on AI infrastructure spending. As a result, it could lead INTC to lose market share to competitors like NVDA and Arm Holdings plc (ARM) in the data center computing market.

Moreover, analysts at Bank of America decreased their price target on the stock from $44 to $40, citing rising costs, slower growth prospects, and intensified competition.

Additionally, INTC’s elevated valuation exacerbates market sensitivity. In terms of forward non-GAAP P/E, the stock trades at 27.58x, 18.9% above the industry average of 23.19x. Furthermore, its forward EV/Sales of 2.93x is 5.7% higher than the industry average of 2.77x. And the stock’s forward EV/EBIT of 31.80x compares to the industry average of 19.07x.

Also, the stock’s trailing-12-month gross profit and EBIT margins of 41.49% and 1.29% are 14.7% and 73.1% lower than the industry averages of 48.64% and 4.80%, respectively. Likewise, its asset turnover ratio of negative 0.29x compares to the industry average of 0.61x.

Given this backdrop, while we wouldn’t recommend investing in INTC now, keeping a close eye on the stock seems prudent.