Intel's Q3 Highlights Competitive Pressures

Intel INTC reported third-quarter results that could be characterized as a mixed bag, including continued strength in cloud spending and notebook PC demand, while enterprise and government data center sales fell significantly and margins contracted. Management had anticipated these trends, though the ultimate mix skewed more to margin-dilutive products such as 5G networking ASICs and notebook PC CPUs than we had expected. While COVID-19 has accelerated the digital transformation to boost cloud and notebook PC demand to support working and learning from home, other areas of Intel’s broad business have been negatively impacted (such as Internet of Things, Mobileye, and memory). Cloud spending is expected to slowdown after four consecutive quarters of double-digit year-over-year growth for Intel’s cloud-related data center group, or DCG, revenue.

Shares were down nearly 10% during after-hours trading and are back to similar levels to the end of July when Intel announced its 7-nanometer process would be delayed at least six months. CEO Bob Swan reiterated Intel’s 2023 products would be made on either Intel 7-nm fabs or external foundries or a mix of both. We like Intel’s recent deal to sell its NAND business to SK Hynix for $9 billion, as it will allow the company to streamline its focus on its core competencies of CPU design and manufacturing while providing a solid cash infusion. Although the next few quarters are likely to be challenging for the firm as AMD continues to attack Intel’s PC and server CPU dominance, we believe Intel’s 10-nm Tiger Lake notebook CPUs and Ice Lake server CPUs should help it mitigate share loss. We are maintaining our $70 fair value estimate for wide-moat Intel and continue to view shares as undervalued.

Third-quarter sales were down 4% year over year, as PC-centric sales rose 1% and data-centric sales fell 10%. Management expects fourth-quarter sales of $17.4 billion, which would be down 14% year over year.

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