Intel shares rallied on Friday after the chip maker reported better-than-expected second-quarter earnings. But there is an underlying risk to the company's outlook that shouldn't be underestimated: how the artificial intelligence trend is going affect technology spending?
Some analysts are growing concerned that the chip maker (ticker: INTC) may face near term pressures as customers prioritize buying AI-related chips instead of traditional Intel processors.
Intel CEO Patrick Gelsinger admitted as much. "We do think that the next quarter, at least, will show some softness [for the data center business]," he said on the earnings conference call. "We do see that big cloud customers, in particular, have put a lot of energy into building out their high-end AI training environments. And that is putting more of their budgets focused or prioritized into the AI portion of their build out."
The executive, however, said Intel is positioned to benefit from AI in the long run because it will mean greater demand for their server central processing units and chips that can make AI function faster -- the so-called AI accelerators in tech parlance.
BofA Global Research analyst Vivek Arya is unconvinced, noting Nvidia $(NVDA)$ dominates the AI semiconductor market with graphics processing units that are well suited for AI. "We reiterate Underperform [rating] since Intel remains secularly exposed to cannibalization of legacy CPU-based computing by AI compute," he wrote in a research note.
There are also doubts over whether Intel's financial results can keep beating expectations. On Thursday, the company posted June quarter revenue of $12.9 billion, which was well above the $12.1 billion had anticipated. Its shares were up 6.5% to $36.79 on Friday afternoon.
But the vast majority of the sales outperformance came from the chipmaker's client processor business: the semiconductors used for consumer and work PCs. This type of upside could be a one-time event because an unexpected bump that came as the sector worked its way through high inventory levels is behind the company.
"Intel's PC business has largely normalized and likely to grow in line modestly with the market with no abnormal [inventory-related] channel refill benefits," Arya wrote.
And Intel's data-center unit remains weak. Wall Street, traditionally, has been more focused on the data-center business, which sells higher-priced server processors to corporations and cloud computing companies. As mentioned by Gelsinger, the outlook there isn't as good as in the client processor business.
Bernstein noted data-center revenue for the June quarter declined by 15% year over year, with a modest operating loss. "Results remain objectively bad with continued near-term data center headwinds [with] key businesses still losing money," Bernstein analyst Stacy Rasgon wrote.
Last week, Taiwan Semiconductor Manufacturing Chairman Mark Liu said the chip manufacturer saw signs that AI-related demand was taking sales away from traditional server chips.
And with the latest surveys of technology buyers and major chip executives saying customers are feverishly prioritizing artificial-intelligence projects above all else, a spending pause for non-GPU chips may last several quarters or several years , not just one.
Ultimately, big shifts in technology are rarely a one-quarter phenomenon.
