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.

The Intel (INTC) Conundrum: When Will the Bleeding Stop?

Prominent chipmaker Intel Corporation’s (INTC) shares plunged more than 14% over the past five days. This downward trend follows the revelation that Intel incurred a significant operating loss of $7 billion last year for its chip-manufacturing unit, also called the foundry business, about 35% worse than in 2022. The unit reported revenue of $18.90 billion for 2023, down 31% year-over-year.

During an investor presentation, INTC’s CEO Patrick Gelsinger discussed the company's projections, stating that 2024 would likely mark the peak of operating losses for its chipmaking division. He mentioned that Intel anticipates reaching break-even on an operating basis by around 2027.

Pat Gelsinger further acknowledged challenges in the company’s foundry business, attributing to poor decisions, including one year ago against extreme ultraviolet (EUV) machines from the Dutch company ASML Holding N.V. (ASML). Although these machines can cost more than $150 million, they are considered more cost-effective compared to earlier chip-making tools.

Partially due to these missteps, Intel has outsourced approximately 30% of its total wafer production to external contract manufacturers like TSMC, Gelsinger added. The company’s goal is to lower this number to around 20%.

Additionally, the semiconductor giant has now transitioned to using EUV tools, which are expected to handle an increasing portion of production requirements as older machinery is phased out.

“In the post EUV era, we see that we're very competitive now on price, performance (and) back to leadership,” Gelsinger stated. “And in the pre-EUV era we carried a lot of costs and (were) uncompetitive.”

However, on a negative note, investment bank Bernstein analysts recently remarked that there is no compelling reason to hold Intel stock until 2030.

Bernstein recognizes the potential for improvement in Intel’s foundry business, given the significant loss incurred last year and the optimistic projection for achieving a 25-30% operating margin by 2030.

However, analysts cautioned, suggesting that the road ahead for INTC might be challenging, even with the seemingly ambitious targets. They noted that reaching break-even may not happen until after 2027, and the ambitious goals set for 2030 are speculative and dependent on achieving optimal progress, which remains a topic of debate.

In the last reported earnings, INTC surpassed analysts’ estimates on revenue and EPS. However, the chipmaker announced a weak forecast for the current quarter. For the quarter that ended December 31, 2023, INTC’s net revenue increased 10% year-over-year to $15.40 billion. This surpassed the consensus revenue estimate of $15.17 billion.

Also, net income attributable to Intel was $2.70 billion, compared to a net loss of $700 million in the previous year’s period. The company reported an EPS of $0.63, compared to analysts’ estimate of $0.22, and a loss per share of $0.16 in the same quarter of 2022.

However, as of September 30, 2023, the company’s cash and cash equivalents stood at $7.07 billion versus $11.14 billion as of December 31, 2022.

Intel’s fourth-quarter 2023 report marked a return to growth after eight consecutive quarters of decreasing earnings and seven straight quarters of declining sales on a year-over-year basis. But for the first quarter, the chip company projected adjusted EPS of just $13 on sales of $12.70 billion. Analysts expect earnings of $0.14 per share on revenue of $12.78 billion.

During an earnings call, Intel CEO Patrick Gelsinger stated that the company’s first-quarter sales would be impacted by difficulties at Mobileye, where Intel holds a majority stake, and in its programmable chip unit.

Gelsinger also mentioned that Intel’s core businesses, particularly PC and server chips, were performing strongly, with sales expected to fall within the lower end of the seasonal range.

On March 21, INTC announced plans to invest $100 billion in constructing and expanding chip factories across four states in the U.S., following securing $19.50 billion in federal grants and loans and wishes to secure another $25 billion in tax breaks.

Intel’s primary focus in its five-year spending plan is to convert undeveloped land near Columbus, Ohio, into what CEO Pat Gelsinger described as “the largest AI chip manufacturing site in the world,” with potential commencement in 2027.

In addition, the chip giant intends to revamp sites in New Mexico and Oregon while expanding its presence in Arizona. This initiative aligns with rival Taiwan Semiconductor Manufacturing Company Ltd. (TSM) construction of a massive factory in Arizona, leveraging President Joe Biden's efforts to bolster advanced semiconductor manufacturing in the U.S.

Intel was at the forefront of the semiconductor industry for decades and was known for producing the fastest and smallest chips. The company commanded premium prices for its products and reinvested its profits into continuous research and development (R&D), aiming to stay ahead of its competitors.

However, in the 2010s, INTC’s manufacturing superiority waned, particularly in comparison to TSM. This shift resulted in a significant drop in profit margins as Intel had to lower prices to maintain its market share, even though its products were perceived as less competitive than its rivals.

In 2021, Gelsinger unveiled a strategy to restore Intel to its former top position in the semiconductor market, acknowledging the necessity of government support to ensure the plan’s profitability. With the federal support secured, the chipmaker is now gearing up for substantial investments.

Gelsinger mentioned that approximately 30% of the $100 billion budget will be earmarked for construction expenses, covering labor, piping, and concrete. The remaining funds will be utilized to acquire chipmaking tools from firms like ASML, Tokyo Electron, Applied Materials, Inc. (AMAT), and KLA Corporation (KLAC), among others.

Moreover, Intel's strategy for business turnaround hinges on persuading external companies to use its manufacturing services. In February, INTC announced that Microsoft Corporation (MSFT) plans to use its services to manufacture a tailored computing chip. Moreover, the company expressed optimism about exceeding its internal target of surpassing TSM in advanced chip manufacturing before 2025.

As a part of this plan, INTC recently told investors it would start reporting the results of its manufacturing operations as a separate unit.

Intel’s new reporting structure, effective from the first quarter of 2024, includes operating segments such as Client Computing Group (CCG), Data Center and AI (DCAI), Network and Edge (NEX), Intel Foundry, Altera (now Intel’s Programmable Solutions Group), Mobileye, and Other. CCG, DCAI, and NEX will be collectively known as Intel Products, while Altera, Mobileye, and Other will be referred to as All Other.

The newly established Intel Foundry segment, including foundry technology development, foundry manufacturing and supply chain, and foundry services, will recognize revenues generated from external foundry customers and Intel Products, along with technology development and product manufacturing costs historically allocated to Intel Products.

Intel’s CFO, Dave Zinsner stated, “This model is designed to unlock significant cost savings, operational efficiencies and asset value. As it begins to take hold, we expect to accelerate on our path toward achieving our ambition of 60% non-GAAP gross margins and 40% non-GAAP operating margins in 2030. Ultimately, improved cost competitiveness will help us deliver process technology, product, and foundry leadership while driving significant financial upside for Intel and our owners.”

Bottom Line

Last week, INTC confirmed its intention to separate the financial results of its foundry business, providing investors with a closer look at its historical performance. However, the revealed figures were disappointing: the foundry business suffered losses of nearly $7 billion in 2023, a 35% increase in losses compared to 2022, alongside a 31% decrease in sales.

Along with these figures, the company stressed that the new financial reporting structure is designed to boost cost discipline and higher returns by offering enhanced transparency, accountability, and incentives across the business. Moreover, this transition is expected to unlock unrealized value across Intel’s about $100 billion in capital assets.

Last month, Intel unveiled plans to spend those $100 billion on building or expanding chip factories in four U.S. states. As part of its turnaround strategy, the chipmaker aims to convince external companies to utilize its manufacturing services. The company has been heavily investing to compete with its main chipmaking rivals, including TSM and Samsung Electronics Co Ltd.

Despite Intel’s optimism about turning the business around and achieving break-even by 2027, with a projected adjusted operating profit margin of 30% by 2030, analysts, including those at Bernstein, are cautious. They view Intel’s forecast as overly ambitious, suggesting that actual margins might only reach 25% by 2030.

Further, CNBC’s Jim Cramer advises investors to avoid investing in Intel despite the company’s turnaround plans.

While INTC is actively pursuing its turnaround initiatives, it currently encounters significant challenges, including underperformance within its foundry business, fierce competition, and cash burn. So, it could be wise to steer clear of this stock now.