Intel stock hits its lowest price in over a year, and there’s another shoe to drop

Intel Corp. weathered another tough investor reaction to its earnings report on Thursday, and analysts say the chipmaker faces another potential challenge in addition to falling margins: a looming PC oversupply that promises to affect its largest segment of activity.

Intel INTC Shares,
fell more than 6% on Thursday and hit an intraday low of $47.78, their lowest trade since Dec. 22, 2020, when they touched $45.77. The stock was Thursday’s worst performer on the Dow Jones Industrial Average DJIA,
which was flat.

The stock was heading for the seventh straight quarter in which it fell the day after the earnings release, even as Intel beat earnings expectations each time. According to FactSet data, the average drop in earnings after the last six earnings reports was 9.7% in one day.

While the chipmaker easily beat Wall Street estimates for the quarter in an earnings report late Wednesday, results showed a 7% drop in revenue from client computing, the traditional PC group and the Intel’s largest business unit, at $10.1 billion, which was higher than Wall Street’s estimate at $9.59 billion.

The company’s forecast has raised concerns, however, not only because Intel said fourth-quarter margins fell to 55.4% from 60% in the year-ago quarter, but because of signs that the PC boom that Intel enjoyed is rapidly coming to an end.

For the first quarter, Intel forecast first-quarter adjusted earnings of 80 cents per share on revenue of about $18.3 billion, while analysts polled by FactSet had on average expected earnings of 86 cents per share on revenue of $17.61 billion. The company is waiting to issue annual guidance until its February 17 Investor Day.

Outside of the issue of declining margins, which has been on the table since last quarter, analysts seemed more concerned this time around with how an expected decline in PC growth will hurt Intel as it attempts to rebuild.

Bernstein analyst Stacy Rasgon, who has an underperform rating and a price target of $40, in a note titled “Purgatory,” noted that Intel’s forecast “may possibly be lower than they don’t appear on the surface” because the first quarter contains an extra week compared to a year ago.

From there, the analyst focused on a correction in PC growth forecasts appearing on the horizon. In 2021, PC shipments hit their highest level in nearly a decade, fueled by the COVID-19 pandemic.

“PC processors [central processing units] (which we thought were overcapacity, especially in laptops) are now definitely entering a correction phase, which could make unit growth difficult next year, even if PCs remain strong, and the trajectory of data centers is driven by a likely unsustainable corporate force (+53% [year-over-year]) with 5 straight quarters of (worrying) cloud decline,” Rasgon said.

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Evercore ISI analyst CJ Muse, who has an online rating and price target of $55, said if chip demand remains strong, “market fears over inventory buildup could cause surface for PC processors”.

“Intel guided March Q revenue down 6% [quarter-over-quarter] directed by [notebook] declines as customers burn through accumulated CPU inventory,” Muse said. “Customers ordered processors based on robust end-demand trends in CY21, but were unable to obtain matching sets given current industry constraints and are now forced to etch the oversized components.”

“The bad news, this is clearly inflaming the bearish debate around inventory pockets,” Muse said. “The good news, this dynamic does not speak to end demand, but rather a transient issue (although INTC expects the constraints to last until CY23).”

Citi Research analyst Christopher Danley, who has a neutral rating and lowered his price target to $55 from $58, said Intel’s expected inventory correction in the laptop end market was a ” red flag”.

“Before 2020, PC units were down 1% on average, to about 260 million units per year,” Danley said. “Due to work/school from home trends, PC units grew 14% to 299 million units in 2020 and about 12% to 335 million in 2021, well above the average historical decline of 1 %.”

“However, we expect this trend to average back in 2H22 as PC demand matures and with inventory correcting after two consecutive years of double-digit growth,” Danley said.

Cowen analyst Matthew Ramsay, who has an outperform rating and a price target of $60, called Intel’s report a “complicated quarter” in that while revenue benefited from growth in PC and business spending, declining margins posed a “harder reality.”

“Magnitude and reality are setting in for investors…which may ultimately be a good thing in our view, as it potentially allows sentiment to bottom out with a margin trough soon to follow…although the key will be chart a credible path to recovery,” Ramsay said.

Of the 40 analysts who cover Intel, 10 have buy ratings, 21 have hold ratings and nine have sell ratings, along with an average price target of $54.43, according to FactSet.

About Raymond A. Bentley

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