steven36 Posted October 23, 2020 Share Posted October 23, 2020 Summary Intel met Q3 financial targets, but the market was caught off guard expecting another big beat. Investors now have to face the reality that the company will see sales collapse 14% from last Q4. The SK Hynix deal will hit revenues in 2021, damping sentiment. The stock should be avoided until Intel can turn around operations. After multiple warning to investors, Intel finally prints a quarter with revenue declines and forecasts very weak Q4 numbers. The market will now have to digest a period where key competitors take large swaths of market share from the chip giant. My investment thesis has constantly stressed to investors to avoid the semiconductor giant in the face of these struggles led by failures in processing. Ignored Reality Over the last few years, Intel has managed to report far-better-than-expected results to delay the inevitable reality of Advanced Micro Devices (AMD) taking market share in key areas such as data center. In the last 5 quarters, the chip giant has beaten revenue estimates by at least $825 million each quarter. While the Q3 results and Q4 guidance were generally in line with expectations, the investor base is likely shell-shocked that Intel isn't going to bounce back with better-than-expected numbers. Intel reported Q3 revenues of $18.3 billion that only beat analyst estimates by $40 million. The chip giant actually saw revenues fall 5% over last Q3, and guidance suggests results are getting much worse. The Q4 revenues were pegged at $17.4 billion, suggesting Intel will indeed watch quarterly revenues fall 14% to end the year. Even worse, the data-centric group is forecasting a 25% decline after a quarter where data center revenues alone fell ~10% to $5.2 billion. Source: Intel Q3'20 presentation Intel is now set to lose tons of market share to AMD, which has already launched 7nm server chips while the chip giant is stuck trying to improve yields on 10nm for years now. AMD is expected to launch 5nm chips next year, and the company already has a recent history of improving processing technology with the help of Taiwan Semiconductor Manufacturing Co. (TSM). Customers are surely lining up to switch to EPYC server chips for better cost and performance. Even worse for Intel, gross margins took a big hit from pricing pressures and shifts in end-user demand, such as demand moving to notebook from desktop. Margins dipped 5.5 points to only 54.8% in Q3, causing earnings to slump 22% to $1.11 per share. The reality will now set in that 2021 EPS is likely to dip below 2019 levels of $4.87. One has to really wonder how much market share AMD can take in the CPU market considering most segments are below 25% now and the server market is just now around 10%. Cash Problems These weak quarterly numbers highlight why my view has been so against share buybacks for the chip giant. Intel has spent $14.2 billion this year on share buybacks, and the company has plans to complete a $10 billion ASR plan, while oddly predicting weak results. The stock is now back to the lows of the year. When revenue is forecast to substantially dip over a period of a few quarters, any company would be wise to just solidify the balance sheet, instead of trying to prop up the stock. Especially considering Intel ended the quarter with only $18.3 billion in cash, while the total debt load is up at $36.6 billion. Even without the buybacks this year, the chip giant would still have net debt of $4.1 billion, while the $14.2 billion buyback only amounted to a ~5.0% reduction in the share count to 4.2 billion shares. Clearly, Intel hasn't generated the cash flows in order to justify such large buybacks that aren't even that big. The company is selling the NAND memory and storage business to SK Hynix (OTC:HXSCF) for ~$9 billion. The deal is oddly set up for a protracted final closing so that Intel will obtain the following payments in an extended final closing: Late 2021 - $7 billion March 2025 - $2 billion The NAND unit generated $600 million in operating income for the 1H of the year, so a $9 billion payment over an extended period doesn't necessarily offer value to Intel shareholders. Once the original $7 billion payment is received next year, Intel will have a far better balance sheet, but the EPS will dip with the removal of over $1 billion in operating income or something close to $0.25 in EPS. The current 2021 revenue target of $73.8 billion could easily dip to $68.0 billion now. The removal of the large revenue base will contribute to a reduction in 2021 revenue guidance as the division is moved to held for sale. The current 2021 revenue target of $73.8 billion could easily dip to $68.0 billion. While the value on the deal can be questioned, the market prefers revenue growth, and the exit of the smartphone modem and NAND memory business do nothing but pressure revenue growth and further hurt the market mindset on the company. A prime example is how the Q4 guidance doesn't reflect lost modem revenues. Selling units can offer benefits to a more focused corporation, but Intel isn't exactly winning in the CPU/GPU businesses, where failures in advancing faster processing technologies are clear. The company just appears to be dumping units in order to distract investors and raise cash for a weak balance sheet. Takeaway The key investor takeaway is that Intel will trade weak for months now as reality sets in on the dismal position of the chip giant. Investors will have to deal with multiple quarters where revenues decline by up to 14%. In addition, the management team has wasted billions on stock buybacks while knowing weak results were ahead. The removal of the NAND business from operations next year will hit investor sentiment yet again, as 2021 guidance will initially miss estimates due to not including such a large business unit. Investors must avoid Intel until operations improve and the company produces market-leading chips again. Source Link to comment Share on other sites More sharing options...
steven36 Posted October 23, 2020 Author Share Posted October 23, 2020 Intel falls 12% after 3rd quarter earnings show server segment unexpectedly shrinks Intel fell 12% on Friday after it reported third quarter earnings on Thursday that revealed an unexpected drop in its data center segment. The segment had posted strong growth in the first half of 2020, but capacity digestion led to a significant decline in the third quarter, and Intel guided for a continued decline in the fourth quarter. Intel's third quarter revenue beat estimates, its profit met expectations, and it raised its full-year guidance. But that wasn't enough to stem the decline in shares. "We reiterate our Sell rating based on ongoing concerns regarding the company's long-term competitive position in CPUs and margin profile that we expect will weigh on forward earnings expectations and the stock's multiple," Goldman Sachs said in a note on Friday. The COVID-19 pandemic had a mixed impact on Intel's third quarter earnings, which beat revenue estimates and included a raised full-year guidance outlook. But while the pandemic helped boost Intel's PC business by 1% thanks to a surge in consumer demand for laptops and desktops, its data center group posted an unexpected revenue decline of 7% in the quarter. That's after the data segment posted considerable growth of more than 40% in the first half of 2020. According to Goldman Sachs, Intel is entering a period of capacity digestion and will see a continued decline in the segment in the fourth quarter. The fall in Intel's data service business was most impacted by its Enterprise & Government unit, which recorded a decline of 47%. Intel dropped 12% in Friday trades as investors took in the earnings report. Here are the key numbers: Revenue: $18.3 billion, versus the $18.26 billion estimate Adjusted EPS: $1.11, in line with analyst estimates For the year, Intel expects to record revenue of $75.3 billion, better than its prior guidance of $75 billion. The company raised its full-year earnings-per-share guidance to $4.90 from $4.85. But Intel expects continued weakness in its data service unit going into the fourth quarter. The company guided for a fourth quarter decline of 25% in the segment. "We reiterate our Sell rating on INTC as 1) we believe that tactically the correction in DCG is likely to weigh on the earnings outlook and multiple in the near term, and 2) we have ongoing concerns regarding the company's long-term competitive position in CPUs and margin profile," Goldman Sachs said in a note on Friday. Goldman's $46 price target on Intel represents potential downside of 15% from Thursday's close. Source Link to comment Share on other sites More sharing options...
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