Intel Earnings: We’re a Bit More Optimistic About Intel’s Turnaround Plans

No-moat Intel INTC reported third-quarter results and provided investors with a fourth-quarter outlook that were ahead of our expectations, as its PC processor business recovers from a previously dreadful demand environment. We raise our fair value estimate to $40 from $35, and even with shares up about 8% after hours, we view shares as slightly undervalued.

We’re encouraged that Intel signed up two new customers for its most advanced manufacturing process, Intel 18A, to arrive in 2025, while a fourth customer agreement appears to be pending. We don’t think these deals are inconsequential and they bode well for solidifying its foundry aspirations. Management’s aggressive product roadmap of five process nodes in four years (ending in 2025) remains on track. On the artificial intelligence front, Intel’s pipeline for Gaudi accelerators doubled in the past quarter to about $2 billion. Although this figure is still a far cry from Nvidia’s business, and even with U.S. restrictions on China looming as a risk, Intel is optimistic that AI accelerators like Gaudi might start to make a favorable dent in revenue in the quarters ahead.

Intel’s revenue in the September quarter was $14.2 billion, down 8% year over year but up 9% sequentially and ahead of the high end of guidance of $13.9 billion. Client Computing was the bright spot, up 16% sequentially and ahead of management’s expectations, as the PC overhang that weighed on both Intel and AMD in recent quarters appears to be abating. Data Center and AI, or DCAI, revenue was down 5% sequentially but saw modest sequential growth in server processors. Adjusted gross margin of 45.8% was up 600 basis points sequentially, exceeding guidance of 43%, thanks to higher revenue and pricing, as well as sales of previously written-off inventory.