Intel Corporation (INTC), a world leader in the design and manufacturing of computing and other related products, reported fiscal 2023 third-quarter results, surpassing analysts’ expectations on the top and bottom lines. Also, the company provided strong fourth-quarter guidance, implying revenue growth for the first time since 2020.
After posting better-than-expected earnings, INTC’s shares surged more than 9% on Friday. Moreover, the stock crossed the 50-day and 200-day moving averages of $35.58 and $32.07, respectively, indicating an uptrend.
The chipmaker posted third-quarter adjusted EPS of $0.41, beating analysts’ estimate of $0.22. INTC’s revenue was $14.16 billion, above the consensus estimate of $13.60 billion. However, it dropped nearly 7.7% year-over-year, marking the seventh consecutive quarter of declining sales.
But INTC told investors last Thursday that it expects revenue to grow again in the current quarter.
The boost to Intel’s earnings was mainly due to gains made by its foundry business and growing interest in AI, signs of a recovery in the PC market, and management’s ability to stay on course for several initiatives it had previously laid out for the company.
“We delivered a standout third quarter, underscored by across-the-board progress on our process and product roadmaps, agreements with new foundry customers, and momentum as we bring AI everywhere,” said Pat Gelsinger, Intel CEO.
“We continue to make meaningful progress on our IDM 2.0 transformation by relentlessly advancing our strategy, rebuilding our execution engine and delivering on our commitments to our customers,” he added.
Gelsinger told analysts on a call that the company would slash costs by about $3 billion this year. CFO David Zinsner said that Intel’s EPS benefitted from controlling expenses, with operating expenses decreasing 15% from a year ago. INTC said it has 120,300 employees, a decline from 131,500 last year.
Now, let’s discuss several factors that could impact INTC’s performance in the upcoming months:
Positive Recent Developments
On October 30, Intel announced its intent to operate Programmable Solutions Group (PSG) as a standalone business. This move will give PSG the flexibility and autonomy to fully accelerate its growth and effectively compete in the FPGA industry, which serves various markets like the data center, communications, industrial, automotive, aerospace and defense sectors.
“Our intention to establish PSG as a standalone business and pursue an IPO is another example of how we are consistently unlocking more value for our stakeholders. This will give PSG the independence it needs to keep growing share in the FPGA market, differentiating itself with capacity and supply resilience from IFS, and allowing Intel product teams to focus on our core business and long-term strategy,” said Pat Gelsinger.
On September 29, INTC’s new Fabin Ireland began high-volume production of Intel 4 technology, which uses extreme ultraviolet (EUV) technology. With its Fab 34 production milestone, Intel executes its plan to users in the future for products such as INTC’s upcoming Intel® Core™ Ultra processors, which will pave the way for AI PCs and future-generation Intel® Xeon® processors coming in 2024.
The company’s rising investments in Ireland and existing and planned investments in Germany and Poland create a first-of-its-kind end-to-end leading-edge semiconductor manufacturing value chain in Europe. They serve as a catalyst for additional ecosystem investments and innovations across the European Union (EU).
Mixed Performance in the Last Reported Quarter
For the third quarter that ended September 30, 2023, INTC’s net revenue decreased 7.7% year-over-year to $14.16 billion. Sales in its Client Computing group, including laptop and PC processor shipments, declined 3% from the year-ago value to $7.90 billion. Intel’s Data Center and AI division, which offers server chips, witnessed a sales drop of 10% year-over-year to $3.81 billion.
The company said it has been seeing competitive pressure and a smaller overall market for server processors. Also, Intel’s Network and Edge segment’s revenue was $1.45 billion, down 32% year-over-year.
INTC’s gross margin came in at $6.02 billion, a decline of 7.9% from the prior year’s quarter. However, the company’s non-GAAP operating income grew 16.3% year-over-year to $1.92 billion. Also, non-GAAP net income attributable to Intel was $1.74 billion or $0.41 per share, compared to $1.53 billion or $0.37 in the previous year’s period, respectively.
As of September 30, 2023, the company’s cash and cash equivalents stood at $7.62 billion versus $11.14 billion as of December 31, 2022.
Mixed Historical Performance
INTC’s revenue has declined at a CAGR of 12.2% over the past three years. Its EBITDA has decreased at a 39.3% CAGR over the same period. However, the company’s tangible book value and total assets have improved at respective CAGRs of 22.5% and 9.1% over the same timeframe.
PC Market Showing Signs of Recovery
After two years of steady declines due to COVID-related slowdowns, inflationary pressures, and higher interest rates, the PC industry appears to be showing signs of life, which would be a boon for INTC.
“There is evidence that the PC market’s decline has finally bottomed out,” said Mikako Kitagawa, Research Director at Gartner.
“Seasonal demand from the education market boosted shipments in the third quarter, although enterprise PC demand remained weak, offsetting some growth. Vendors also made consistent progress towards reducing PC inventory, with inventory expected to return to normal by the end of 2023, as long as holiday sales do not collapse,” she added.
According to preliminary results by Gartner, worldwide PC shipments totaled 64.3 million units in the third quarter of 2023, down 9% year-over-year. While the third quarter’s results marked the eighth consecutive quarter of decline for the global PC market, Gartner expects the market to begin recovery in the fourth quarter of 2023.
Furthermore, the agency projects 4.9% growth for the global PC market for next year, with growth expected in both the enterprise and consumer segments.
Solid Fourth-Quarter Guidance
The company’s fiscal 2024 fourth-quarter guidance implies revenue growth for the first time since 2020. Intel expects revenue to come between $14.60 and $15.60 billion. Non-GAAP EPS attributable to Intel is expected to be $0.44 for the fourth quarter.
Mixed Analyst Estimates
Analysts expect INTC’s revenue to increase 7.5% year-over-year to $15.09 billion for the fourth quarter ending December 2023. The consensus earnings per share estimate of $0.45 for the ongoing quarter indicates a 346.7% year-over-year improvement. Moreover, the company has topped the consensus revenue estimates in three of the trailing four quarters.
However, the company’s revenue and EPS for fiscal year 2023 are expected to decline 14.7% and 48.5% year-over-year to $53.76 billion and $0.95, respectively.
For 2024, Street expects INTC’s revenue and EPS to grow 13% and 98.8% year-over-year to $60.73 billion and $1.89, respectively.
Although INTC’s third-quarter earnings and revenue beat analyst estimates, its revenue declined from the year-ago period. After reporting better-than-expected earnings, primarily driven by growth in its foundry business, rising interest in AI, and signs of a recovery in the PC market, the chipmaker expects revenue to grow in the fourth quarter.
While the PC market is recovering after two years of sales declines, there could be a delay in the full recovery of demand for PCs due to prevailing macroeconomic uncertainties. Also, Intel continues to grapple with increased competition and production challenges that could limit the potential for gains in its stock in the near term.
Given its mixed financials and uncertain near-term prospects, it could be wise to wait for a better entry point in the stock.