Intel's long slumber has turned into a bad dream. This week, the company said a slowing global economy is hurting its business, while also acknowledging another delay for one of its most important products.
Chief Financial Officer David Zinsner told investors that the business environment had shifted rapidly from where it was just a month ago. On "the macro side, clearly it's weaker," Zinsner said at a Bank of America technology conference on Tuesday. Customer inventory reductions and component supply issues have been "much worse than what we had anticipated."
At the same conference, Intel's data center general manager Sandra Rivera said the company's next generation server processor would ramp up later than planned because the company needed more product validation time. She added that sales of server chips wouldn't be immune from recent economic volatility.
Intel shares closed down more than 5% on Wednesday, to $41.23, as the market digested the news. There are likely to be more losses ahead. The latest developments suggest Intel is still struggling to execute on CEO Pat Gelsinger's turnaround plan.
Intel's shareholders have grown used to underwhelming performance. For years, Intel has had repeated delays in moving to the latest chip manufacturing technologies, allowing competitors like Advanced Micro Devices and Apple to surpass the chip giant in making higher-performing, more power-efficient chips.
When Intel gave its full-year guidance in April, the company said it expected to see a rebound in PC market demand for the back half of 2022 based on historical seasonality. Analysts were skeptical. AMD, in contrast, told investors the overall PC market had softened and grew more conservative about its industry expectations.
Now, it seems inevitable that Intel will miss its forecasts due to overly optimistic market assumptions. In April, research firm IDC said worldwide shipments for personal computers fell 5% year over year during the March quarter as a result of diminishing demand from consumers, along with supply-chain challenges.
The latest data points show computer demand has deteriorated further.
In May, semiconductor firm Marvell Technology $(MRVL)$ said it saw a "rapid change in tone" in the PC market and expected the weakness to continue. A couple of weeks earlier, Asustek, a large PC maker and component supplier, said that higher energy prices in Europe were significantly impacting its sales by squeezing the spending power of consumers, resulting in higher inventories. Asustek said it was asking its chip vendors to begin offering discounts to stimulate demand. It's not just Europe. Major online retailers in the U.S. are increasingly offering promotions for Intel processors.
For Intel, the industry weakness is exacerbated by the fact that the company is losing market share to rivals. According to Mercury Research, AMD gained about seven percentage points of share from Intel in the X86 processor market for the first quarter, compared with the prior year. AMD's high-end server-chip business has been thriving. The company's EPYC server processor revenue more than doubled during the March quarter, AMD said in its latest earnings report. Over the same period, Intel reported just 22% year-over-year growth for its data-center server unit. Intel's latest delay won't help counter this trend.
The competitive picture for Intel is likely to get more challenging from here. AMD's next chip architecture called "Zen 4" will be released later this year, and Apple just announced a new M2 processor that's heading to its latest MacBooks. Apple was one of the few PC makers that was able to grow its sales during the March quarter.
To be sure, Intel shares aren't expensive. The chip maker trades at a reasonable 12 times Wall Street's consensus earnings-per-share estimate for this year. But the valuation is only accurate if the company is able to meet that estimate. Wall Street currently forecasts Intel to generate $3.49 a share in 2022. The company has forecast EPS of $3.60.
Given its product delays, a rapidly deteriorating macro environment, and rising competitive threats from AMD and Apple, Intel could miss the mark by a significant amount.
Intel declined to give additional comment when asked about the risks surrounding its full year financial outlook. The company pointed Barron's to Zinsner's and Rivera's conference remarks about the current business and market conditions.
Last year, Intel shareholders had reasons to be more hopeful. Pat Gelsinger had returned to become its chief executive. His reputation for engineering know-how had reinvigorated the company's ability to hire top technical talent. He also implemented an aggressive turnaround strategy, expanded the company's foundry business, and instituted a bold road map for future products.
Gelsinger's plan may still work out, and Intel's long-term future could be bright. But investors need to brace for a bumpy year.
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