Intel Earnings: Turning the Corner In PCs, but Much Work to Be Done

Intel Stock at a Glance

• Fair Value Estimate: $35.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Intel Earnings Update

Intel INTC reported second-quarter results and a third-quarter outlook that, while ugly, were both still better than expected. We view this as a bottom for the company since the PC inventory correction appears to be winding down. We’re also encouraged that Intel’s various manufacturing advancements, such as Meteor Lake’s arrival in the fourth quarter, are still on track, as we think it is critical for Intel to achieve its aggressive target to transition to five nodes in four years. We maintain our $35 fair value estimate and view shares as fairly valued.

Revenue in the June quarter was $12.9 billion, down 15% year over year but up 10% sequentially and ahead of guidance of $12 billion. Client computing group revenue (which mostly pertains to PC processors) was the bright spot, up 18% sequentially. The company believes PC inventory is closer to supply/demand parity after several quarters of excess supply that weighed on processor orders. Revenue for the data center and artificial intelligence segment was down 14% year over year but also came in a little bit better than expected.

Enterprise customers cut back on server processor spending, particularly in China. However, Intel also conceded a shift in the share of wallets toward servers used for AI workloads, as evidenced by Nvidia’s stellar 2023 outlook. Adjusted gross margin was also better than expected at 39.8% compared with guidance of 37.5%, thanks to higher sales.

Intel expects third-quarter revenue to be in the range of $12.9 billion-$13.9 billion, which at the midpoint would represent a decline of 13% year over year but up 3.5% sequentially. Encouragingly, it anticipates adjusted gross margin to expand to 43%, again in large part because of higher sales levels. Similarly, Intel expects to achieve breakeven free cash flow on a quarterly basis later this year, despite its hefty capital expenditure plans.