Intel: Big Disappointment Deserves Aggressive Response

seekingalpha08-02

Intel shares dropped over 20% after disappointing Q2 results, missing revenue and earnings estimates, with a barely profitable EPS of $0.02.Q3 guidance of $12.5-$13.5 billion fell short of analyst ...

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href=https://seekingalpha.com/article/4709695-intel-big-disappointment-deserves-aggressive-response><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Intel shares dropped over 20% after disappointing Q2 results, missing revenue and earnings estimates, with a barely profitable EPS of $0.02.Q3 guidance of $12.5-$13.5 billion fell short of analyst ...</p>\n\n<a href=\"https://seekingalpha.com/article/4709695-intel-big-disappointment-deserves-aggressive-response\">Source 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Intel's Q2 report, I am downgrading the stock to \"Hold\" until the company can show that earnings and cash flows are stabilising.JHVEPhoto Intel (NASDAQ:INTC) shares crashed more than 20% in after hours trading, after the company reported a weaker than expected Q2 print, disappointing against Wall Street estimates on both topline and earnings. Notably, revenue in the June quarter fell YoY, while GAAP EPS came in at a barely profitable $0.02 per share (GAAP EPS was negative). In addition, guidance for Q3 came in worse than what analysts projected, at $12.5 to $13.5 billion. Responding to the disappointing earnings print, management announced an aggressive cost-saving program, which could see a headcount reduction of about 15,000 employees. While the lay-off ambition should protect some operating profit over the next few years, the financial outlook for Intel is increasingly becoming clouded. I downgrade the shares to \"Hold\", admitting that my bullish commentary given in March this year was too early. For context, since the start of the year, Intel shares have grossly underperformed the broader market: YTD, INTC stock is down about 4%, compared to a gain of approximately 14% for the S&P 500. Seeking Alpha Intel's Q2 Disappoints Big ... Intel reported its second-quarter results on Thursday, August 1st, falling short of market expectations. During the period spanning from April through the end of June, the U.S. semiconductor and tech giant generated $12.8 billion in revenue, a decrease of approximately 1% YoY and about $150 million below what has been projected by analyst estimates. On a segment basis, only Client Computing Group (CCG) and Intel Foundry Services showed YoY growth, reporting $7.4 billion (+9% YoY) and $4.3 billion (+4% YoY) of sales, respectively. Meanwhile, revenue in the Network and Edge (NEX) segment fell $1.3 billion, down 1% YoY. Most disappointingly, Data Center and AI (DCAI) recorded only $3.0 billion in revenue, down 3%. Profitability also came in worse than expected: In Q2, Intel achieved a gross margin of only 35.4%, down 1 ppts., compared to the same period one year earlier. Operating margin fell to negative 15.3%, down 7.5 ppts., versus Q2 in 2023. On that note, Intel CFO David Zinsner commented: Second-quarter results were impacted by gross margin headwinds from the accelerated ramp of our AI PC product, higher than typical charges related to non-core businesses and the impact from unused capacity. Net income was reported at a loss of $1.6 billion, compared to a gain of $1.5 billion for the same period one year earlier. The drop in profit was driven by ~$700 million in incremental restructuring charges and ~$200 million in incremental R&D costs. The remainder was caused by the 1% decline in sales, paired with the 40 basis point decline in gross margin. EPS was negative 38 cents, reflecting a miss of about 27 cents compared to what Wall Street projected, according to data collected by Refintiv. (all numbers according to GAAP reporting). Intel Q2 2024 reporting ... With Weak Guidance Together with Q2 results, Intel warned that the outlook for the upcoming Q3 quarter is worse than expected: For the period from June through October, Intel expects $12.5-$13.5 billion in sales, missing estimates by about $2 billion. At the same time, gross margin remains depressed at 38% non-GAAP, while net profitability should continue to hover around break-even (3 cent loss projected).   Intel Q2 2024 reporting   Interestingly, guidance underwhelmed, despite Intel announcing that a number of new products like Lunar Lake and Intel Gaudi 3 are set to be ready for production in Q3. In my view, this points to negative customer perception and appreciation of Intel's upcoming product launches, with under-whelming pre-order commitment, and highlights the competitive nature in the semiconductor market. Operational Restructuring Welcome; But Structural Problems Cannot Be Hidden Responding to the disappointing results, Intel management vowed to take aggressive actions to control costs. Specifically, the company plans to adjust efficiency through new operating models while eliminating 15,000 of jobs, with workforce reductions that may come as early as this week. According to company estimates, and assuming the full scope of cuts is achieved, this should save Intel up to $10 billion by 2025/2026 (depending on the timeline). Intel Q2 2024 However, this does not necessarily mean that the cost savings will flow to free cash flow, or the bottom line in the income statement. In fact, I point out that Intel needs the capital to invest heavily in research and development to improve Intel's technology and regain its position in the semiconductor industry. This effort is critical for Intel's long-term competitiveness, especially as peers like Advanced Micro Devices (AMD) and Nvidia (NVDA) are taking market share from Intel in Data Center, after having pressured Intel's standing in Client Computing. Moreover, Intel is spending on building new factories for foundry. To highlight the extent of Intel's cash needs, I point out Intel's decision to suspend the dividend starting in the fourth quarter of this year. Valuation Shifting perspective to valuation, I highlight that Intel is not necessarily a cheap stock, despite the company's obvious struggles. In fact, Intel shares are trading at 27x projected 2025 earnings, compared to a 24x for the sector. Personally, I am waiting for a P/E multiple of <20x (on stable earnings) to feel comfortable buying into Intel shares. Seeking Alpha Investor Takeaway  Intel shares plummeted over 20% in after-hours trading following the release of weaker-than-expected Q2 results, falling short of Wall Street's estimates for both revenue and earnings. Revenue for the June quarter declined YoY, and EPS was barely positive at $0.02 per share, with GAAP EPS in the negative. Additionally, the Q3 guidance, ranging from $12.5 to $13.5 billion, was below analysts' expectations by as much as $2 billion. In response to these disappointing results, management announced a significant cost-saving program, which includes a potential headcount reduction of about 15,000 employees. While these layoffs may help protect operating profit in the coming years, I don't see lots of free cash flow for Intel through the next few years, as the company must be spending aggressively in R&D and CAPEX to catch up with rivals. Following Intel's Q2 report, I am downgrading the stock to \"Hold\" until the company can show that earnings and cash flows are stabilising.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"Business Data","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2456111280"}