To The Moon

$Intel(INTC)$

Yesterday, Intel, once a giant in the chip industry, released its third-quarter earnings report, which surpassed expectations, leading to a 7% increase in its stock price.

The report revealed that Intel's revenue for the third quarter was $13.28 billion, slightly above the analyst estimate of $13.025 billion. However, due to a significant increase in restructuring and impairment charges, earnings per share fell well below expectations. Since these charges are one-time events, the disappointing profit figures did not overly concern investors.

So, has Intel truly emerged from its low point? Will it rebound in the future?

Intel was once the leader in the chip market, monopolizing the CPU space. However, as AMD rose and Intel's manufacturing processes lagged behind TSMC, its market share steadily declined. Following the launch of ChatGPT, the AI chip market exploded, benefiting NVIDIA and AMD, while Intel missed the AI revolution due to aggressive capacity expansion and outdated technology.

Currently, Intel continues to pursue its integrated design-manufacturing model and announced a four-year, five-node plan aimed at catching up with TSMC and reclaiming CPU market share.

According to the report, management believes the five-node plan is progressing well. The most advanced 18A process is expected to begin production of Intel's AI chips in the second half of next year. Additionally, Intel is negotiating a multi-billion dollar contract with Amazon to launch new custom Xeon 6 chips and new AI chips for AWS.

If Intel's 18A process progresses smoothly and achieves good yields, it will greatly benefit both its chip foundry and its own chip business. However, the market remains skeptical. While mastering advanced chip manufacturing is feasible, ensuring yield is crucial, especially in competing with TSMC.

Samsung, which also employs the IDM model, matches TSMC in manufacturing technology but has struggled with yield issues, preventing it from securing customer approval. As a result, advanced chips from major clients like NVIDIA and Apple are predominantly produced by TSMC.

If Intel can resolve its yield issues, the future could be promising. However, currently, Intel's foundry business is unlikely to secure significant external orders within the next year, primarily focusing on in-house chip production.

Understanding Intel's disadvantages in chip manufacturing sheds light on the underperformance in its other business segments. For instance, the revenue from Intel's traditional PC chip business in the third quarter was $7.33 billion, down 6.8% year-over-year and below the analyst expectation of $7.46 billion. In contrast, AMD's PC chip business saw a revenue growth rate of 29.5%.

The foundry business generated $4.35 billion, an 8% year-over-year decline, also missing the analyst forecast of $4.44 billion. Revenue from networking and edge computing was $1.51 billion, up 4.2%, surpassing the expectation of $1.39 billion. Mobileye reported revenue of $485 million, an 8.5% decline year-over-year, aligning with analyst expectations but having limited impact on Intel due to its smaller revenue scale and intense market competition.

Importantly, revenue from data centers and AI businesses was $3.35 billion, an 8.9% year-over-year increase, exceeding the analyst expectation of $3.15 billion, which surprised the market. The outperformance was primarily due to improved demand for traditional servers. However, Intel has not yet seen significant benefits from the AI sector. The AI chip Gaudi 3 began production this quarter and has been adopted by IBM Cloud, but the transition from Gaudi 2 and software issues slowed shipping speeds, preventing the achievement of the sales target set at the beginning of the year.

Gaudi 3 competes with NVIDIA's H100, while the market currently uses the H200, and NVIDIA is set to produce the more advanced Blackwell soon. Consequently, Intel has yet to capitalize significantly on the AI wave.

Looking ahead to the fourth quarter, Intel projects total revenue between $13.3 billion and $14.3 billion, with a midpoint of $13.8 billion, representing a year-over-year decline of 10.4%, an increase from the 6.2% decline in the third quarter but still above the analyst forecast of $13.6 billion. Gross margin is expected to be 36.5%, significantly higher than the 15% reported in the third quarter but well below Intel's historical level of 60%.

Intel anticipates that, following restructuring, its adjusted free cash flow will return to positive territory next year. Overall, while Intel may have moved past its low point, whether it can regain its peak remains to be seen.