Intel Earnings: We Expect Numerous Headwinds to Ebb Over 2023, Though Competition Remains Intense

Intel INTC reported first-quarter results slightly ahead of our expectations, though the chipmaker remains challenged by weak PC and server demand and competitive pressure from AMD. The firm continues to make progress on its IDM 2.0 strategy to fix its manufacturing process technologies, but we expect Intel’s financial results to remain under duress until 2024 as it navigates margin pressure and soft end-market demand.

We are maintaining our $35 fair value estimate for narrow-moat Intel. Shares were up about 5% during afterhours trading, which we attribute to management’s view of a modest recovery in the second half of 2023.

First-quarter sales fell 36% year over year to $11.7 billion. Client computing group sales fell 38% year over year due to continued inventory reductions at original equipment manufacturers because of weaker PC demand. Data center and AI group sales fell 39% year over year, due to market share loss to AMD and softer enterprise demand. We believe AMD’s share gains have happened predominantly at cloud customers. Notably, management thinks neither the server nor networking markets have reached their cyclical bottoms, which we agree with. Gross margins fell 500 basis points sequentially to 34% due to lower sales volume and factory utilization.

Management expects second-quarter revenue to be down 22% year over year at the midpoint of guidance to $12 billion. Gross margins are expected to remain in the low-30s in the second quarter, with factory under load charges negatively affecting margins by about 300 basis points and higher inventory reserves for new products to be sold later in 2023 affecting margins by 250 basis points. We expect margins to recover to the low-40s in the second half of 2023 as demand slowly recovers and the firm launches new products. We continue to expect capital expenditures for 2023 to be about $20 billion, though we wouldn’t be surprised if Intel pushes out some spending if end market conditions remain tepid.