Following a near-9% bead on Friday in acknowledgment to its Q2 address and balance alarm remarks, Intel’s (INTC) shares are appraisement in a fair bulk of bad news.
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However, acknowledgment to accomplishment issues, tougher antagonism and abeyant slowdowns in action PC and server demand, it’s absolutely accessible that added bad account will access in the short-to-intermediate term, and anticipate the dent behemothic from putting in a basal for now.
After the alarm on Thursday, Intel appear Q2 acquirement of $16.96 billion (up 15% annually) and non-GAAP EPS of $1.04 (up 44%). Those numbers were hardly bigger than analyst estimates, as able-bodied as the advice Intel provided on June 21st, aback it appear CEO Brian Krzanich had accommodated due to a cipher of conduct violation.
Intel additionally guided for Q3 acquirement of $17.6 billion to $18.1 billion and EPS of $1.10 to $1.20, which is favorable to accord estimates of $17.64 billion and $1.08. And it’s now allegorical for full-year acquirement of $68.5 billion to $70.5 billion and EPS of $4.15 (plus or bare 5%), favorable to accord estimates of $68.35 billion and $4.01.
So why did Intel’s shares nosedive post-earnings? There are a few altered reasons.
One of the big factors is that while Intel’s absolute Q2 acquirement exhausted estimates with the advice of stronger-than-expected PC CPU sales, its Abstracts Centermost Group (DCG), which food server CPUs and added abstracts centermost products, absent estimates. DCG acquirement of $5.55 billion, admitting up 27% annually with the advice of able billow and telco demand, fell abbreviate of a $5.64 billion consensus.
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Moreover, on the call, Intel guided for DCG revenue, which rose 25% over the aboriginal six months of the year, to be up alone 20% for the accomplished of 2018. That implies a allusive second-half advance slowdown.
Slower action server sales advance could affect DCG over the abutting two quarters; admitting DCG’s action and government sales were up 10% in Q2, Intel expects them to abatement over the abiding as workloads abide affective to accessible clouds.
Competition from AMD’s (AMD) Epyc server CPU band could be arena some role here. On Wednesday, AMD appear that its Epyc acquirement rose over 50% sequentially off a baby base, and common a ambition of accomplishing a mid-single chiffre server CPU allotment by year’s end. It’s additionally account acquainted that IBM (IBM) , whose Power and System z (mainframe) server curve await on proprietary CPUs, saw better-than-expected accouterments sales in Q2 with the advice of a able mainframe advancement cycle.
Another factor: Intel’s advice indicates its gross allowance (GM) will be pressured during the abutting two quarters. Whereas non-GAAP GM was collapsed annually in Q2 at 63%, Intel expects it to be bottomward a allotment point in Q3 from a year-ago akin of 63.9%. And during the Q&A allotment of the call, Bernstein analyst Stacy Rasgon estimated Intel’s full-year advice implies a Q4 GM of about 59%, which would be able-bodied beneath a Q4 2017 akin of 64.8%.
Rasgon, who downgraded Intel to Underperform anon afterwards Krzanich’s ouster, additionally thinks animated basic spending could — via the abrasion costs eventually recorded for capex — appulse GMs in 2019. Intel acclimated its Q2 address to backpack its 2018 capex account for the additional time in three months; it now expects capex of $14.5 billion to $15.5 billion, well aloft a 2017 akin of $11.8 billion.
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CFO and acting CEO Bob Swan partly abhorrent the accepted second-half allowance abatement on a acquirement mix about-face appear modems and anamnesis chips — Intel is accepted to be the sole modem supplier for Apple’s (AAPL) 2018 iPhones, afterwards accepting aggregate modem accumulation duties with Qualcomm (QCOM) the aftermost two years. He additionally mentioned that Intel’s efforts to access its much-delayed 10-nanometer (10nm) accomplishment action will advise margins, and — conspicuously — that Intel isn’t counting on seeing the aforementioned affectionate of boilerplate affairs bulk (ASP) backbone it witnessed during the aboriginal bisected of 2018.
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ASPs provided a above acquirement addition to both DCG and Intel’s Client Computing Group (CCG – it food PC and adaptable chips) in Q2, and additionally propped up margins. DCG’s ASP rose 11%, while CCG appear a 13% ASP access for desktops and a 2% access for notebooks.
Growing PC and server antagonism from AMD could appulse ASPs a bit activity forward. So could abbreviating allowances from contempo trends that accept additional ASPs, such as a PC mix about-face appear business systems and aftermost summer’s barrage of the well-received Xeon Scalable server CPU family.
The third agency abaft the selloff: Three months afterwards accepting pushed aback its ambition for the alpha of 10nm accomplishment (once accepted by 2016) from the additional bisected of 2018 to some point in 2019, Intel acclimated its alarm to say that it alone expects PCs absolute 10nm chips to be “on shelves for the 2019 anniversary season,” and that 10nm abstracts centermost articles will barrage afterwards.
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As I mentioned afterwards Intel’s Q1 report, its 10nm delays actualize a aureate befalling for AMD and assertive added rivals relying on Asian dent arrangement manufacturers (foundries) to accretion ground, by ablution chips based on 7nm processes that are aggressive with Intel’s 10nm action in backward 2018 and aboriginal 2019. AMD has amorphous sampling both a 7nm Epyc CPU and a 7nm server GPU that are fabricated by Taiwan Semiconductor (TSM) . Apple, Qualcomm and others are additionally believed to be application TSMC’s 7nm action for articles that will be accessible after this year or in the aboriginal bisected of 2019.
Now that befalling to booty allotment in 2019 looks alike stronger. And while Intel ability do a bigger job of rolling out its 7nm action (a date for starting accomplishment hasn’t yet been announced) than it has done with its 10nm process, the actuality that TSMC affairs to alpha accomplishment in aboriginal 2020 for a 5nm action that’s accepted to be aggressive with Intel’s 7nm action agency that the aggregation doesn’t accept abundant of a allowance of absurdity here.
The acceptable account for Intel investors: With shares now trading for aloof 11 times a 2019 EPS accord of $4.22, markets accept already priced in a lot of apropos about competition, margins and growth. And while contempo backbone in action PC and server appeal ability not last, billow and telco server appeal should abide a abiding advance driver. So should, to capricious degrees, Intel’s memory, automotive and IoT opportunities.
That said, Intel’s 2019 accord estimates still betoken a bashful bulk of acquirement and EPS advance about to 2018. And accustomed the aggressive ambiance the aggregation will be adverse acknowledgment to its accomplishment issues and added factors, it’s not a accustomed that the aggregation will hit those estimates.
Should Intel’s 2019 estimates charge to be taken bottomward acknowledgment to aggressive and/or allowance pressures, that could calmly advance its shares, which are still up 36% over the aftermost 12 months, to bead further afore its advance opportunities, and conceivably additionally its 7nm efforts, advice it put in a bottom.
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