Trading On margin

Intel Earnings: Will Mobileye’s IPO Mitigate Falling Margins and Layoff Rumors?

By Wallace Witkowski

Analysts note that Intel hasn’t lowered its guidance or announced earnings like other peers have done in recent weeks as the PC market deteriorates.

Intel Corp. faces an earnings report on Thursday that notably lacked an official pre-announcement, amid a darker-than-expected PC market and layoff rumors — which could quickly overshadow the increase in the initial public offering from his Mobileye unit on Wednesday.

Intel (INTC) is expected to release its third-quarter results after the closing bell on Thursday after reports the company was planning a major round of layoffs. That came close to confirmation last week in a report that chief executive Pat Gelsinger told workers via video that “targeted” layoffs were underway. The last time Intel, based in Santa Clara, Calif., announced a major round of layoffs was in 2016, when the company cut 12,000 jobs, or 11% of its workforce, on the same day it published its quarterly results.

Gelsinger reportedly told employees that “the costs are too high and our margins are too low,” which will again put the spotlight on Intel’s now chronic margin problems. Already, the CEO has had to backtrack on his promise from last year that margins would remain “comfortably above 50%” as prior quarter margins fell to 44.8%, third quarter margins were forecast at 46.5% and the expected annual margin for the year fell to 49%. And in this context, the margins of its competitor Advanced Micro Devices Inc. (AMD) exceeded 50% for the first time and are expected to climb.

Amid all this downward pressure on multiple fronts, Susquehanna financial analyst Christopher Rolland raised a question many have been asking: Why didn’t Intel announce ahead of time?

Earnings warnings from a slowing consumer PC market have been happening for more than a quarter as global PC shipments are set to see their biggest drop since records were set, provoking chipmakers like AMD , Nvidia Corp (NVDA), Micron Technology Inc (MU) and Applied Materials Inc (AMAT) will cut their outlook not only due to weak PC sales, but also to expanded US restrictions on the sale of advanced technologies to China

Read: PC market sees ‘biggest’ drop since data collection began in mid-1990s, analysts say

But Intel didn’t announce ahead of time, just as it didn’t last quarter before announcing a big miss from its own forecast and analysts’ expectations. Rolland, who has a negative rating on Intel, expects revenue to come in below expectations given that “CEO Gelsinger has already publicly telegraphed weakness.”

The only chip-related companies looking bullish this earnings season are chip-making equipment makers, three of which reported beat-and-bump quarters and preferred to focus on long-term capability rather than growth. short-term headwinds, while others like Texas Instruments Inc. (TXN) dampen expectations.

The only small bright spot Wednesday night for data center chip vendors like Intel, Nvidia, Marvell Technology Inc. (MRVL), and AMD was the otherwise dismal revenue report from Meta Platforms Inc. (META), where the media The company said it is increasing its capital budget through 2023 to continue pursuing its metaverse AI ambitions. For now, however, Rolland said his mid-quarter audits indicated the fourth quarter remained at “significant risk” and now forecasts a 17% year-over-year drop in PC shipments for 2022.

“Given the reliance on revenue and usage, we are also reducing our full year GM estimates below their estimated 49%,” Rolland said.

Read: Chip stocks hit two-year low as more tech and China’s AI ban add to woes

Either way, investors will want to know if CFO David Zinsner’s prediction that the third quarter will be a “financial bottom” for the company will hold up.

What to look for

Earnings: Of 29 analysts polled by FactSet, Intel is expected to average adjusted earnings of 34 cents per share, compared to Intel’s forecast of 35 cents per share, well below the 90 cents per share that Street expected at the start of the month. trimester. , and the $1.71 per share reported a year ago. Estimize, a software platform that crowdsources hedge fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of 34 cents per share.

Revenue: Wall Street expects Intel revenue of $15.31 billion, according to 29 analysts polled by FactSet, based on Intel’s forecast of around $15 billion to $16 billion. That’s down from the $18.95 billion Wall Street expected at the start of the quarter and the $18.09 billion reported last year, and will likely mark the ninth straight quarter of a year-long revenue decline. on the other. Estimize forecasts revenue of $15.37 billion.

Breaking down the divisions, analysts polled by FactSet expect client computing revenue to be $7.58 billion; data center and AI group revenue of $4.67 billion; network and edge revenue of $2.4 billion; and Mobileye revenue of $472.2 million.

Stock movement: Speaking of a possible ninth straight quarter of revenue declines, even if Intel beats expectations – as it usually does – stocks have fallen following the company’s last nine quarterly earnings reports. society.

In the quarter ending September, Intel’s stock price fell 31%, while the Dow Jones Industrial Average – which counts Intel as a component – fell 7%, the S&P 500 index fell 5%, the tech-heavy Nasdaq composite index lost 4%, and the PHLX Semiconductor index fell almost 10%.

What analysts say

On Wednesday, shares of Mobileye began trading on the Nasdaq at $21 per share, above its estimated $18-$20 range, and closed 38% higher at $28.97, giving the self-driving company a market capitalization of just over $23 billion, a premium of 51%. what Intel paid to acquire Mobileye in 2017. In late September, Mobileye filed for an IPO, apparently seeking a $30 billion valuation, well below previous estimates of $50 billion for the society.

Prior to the IPO, Bernstein analyst Stacy Rasgon remarked that he saw two reasons, “not very encouraging from Intel’s perspective,” as to why Intel continued its below-expected valuation for Mobileye Global Inc.

“As we all know, high-growth tech stocks have been decimated by a combination of lower macro rates and higher rates, and the IPO market itself has stagnated in recent months,” Rasgon said. . “But going ahead with the IPO now, at (what feels like) whatever price they can get, suggests that Intel still thinks it’s better to do it now than to do it now. expect.”

“And second, Intel will get money from the deal ($3.5 billion dividend from Mobileye and $900 million from the sale of its Moovit asset), and they probably need the money given of their own company’s current trend,” Rasgon said. .

Read: Nvidia, Intel gaming cards go on sale as AMD teases Nov. 3 announcement

Wedbush analyst Matt Bryson, who has an underperforming rating on Intel, questioned in a note whether it had lowered its numbers enough for the fourth quarter and 2023, given that the latest forecast for Intel “assumed a much less gloomy PC backdrop (down about 10% Y/Y)) which appears to have materialized.”

Regarding Intel’s data center business, Bryson said he sees additional risk to his assumptions of a slight uptick in fourth-quarter business revenue, “particularly with market share gains. from AMD [that] are also putting pressure on Intel’s sales.”

“And looking to next year, we have the same question given the macro headwinds and our belief that AMD may even see the share shift accelerate in light of Intel’s struggles with Sapphire Rapids,” said Bryson said.

Of the 36 analysts who cover Intel, seven have a buy rating on the stock, 20 have a hold rating and nine have a sell rating, as well as an average target price of $33.34, which has fallen from $47.26 a quarter ago, according to FactSet data.

-Wallace Witkowski

 

(END) Dow Jones Newswire

10/26/22 2025 ET

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