[video]Intel’s Earnings and Guidance Feature More Good News Than Bad for Chip Stocks

It feels odd to say that an Intel (INTC) earnings report and call that led the CPU giant’s stock to drop more than 11% contained more good news than bad for the chip industry, and perhaps also for PC and server OEMs.

But that’s arguably where we are now, given the extent to which Intel’s top-line woes stem from company-specific issues and how its turnaround efforts include plans to aggressively dial up capital spending.

To recap, Intel:

  1. Posted mixed Q3 results (revenue missed, while EPS beat, though by less than what the headline number suggests after backing out one-time gains).
  2. Issued mixed Q4 guidance (revenue guidance is slightly above consensus, but EPS is below due to gross margin pressures).
  3. Reported weaker-than-expected sales for its server CPU division (the Data Center Group, or DCG), and also forecast DCG would see “more modest growth” in Q4 than previously expected, while blaming supply chain issues and softer demand from Chinese cloud giants due to regulatory headwinds.
  4. Reported better-than-expected sales for its PC CPU division (the Client Computing Group, or CCG), but also forecast CCG’s sales would be roughly flat sequentially in Q4.
  5. Reported healthy sales growth for its Internet of Things Group (IOTG), Programmable Solutions Group (PSG) and Mobileye ADAS vision processor unit, thanks to both good demand and favorable comps.
  6. Guided for 2022 revenue of “at least” $74 billion — slightly above expected 2021 revenue of $73.5 billion and a consensus of $73.1 billion — while adding that it’s aiming for a 10%-12% revenue compound annual growth rate (CAGR) in subsequent years.
  7. Set a 2022 capex budget of $25 billion to $28 billion, sharply above a 2021 budget of $18 billion to $19 billion, while adding there’s “potential for further growth” to capex in subsequent years.
  8. Guided for its non-GAAP gross margin to be in a range of 51% to 53% over the next 2-3 years — well below a 2020 GM of 59.4% — due to high capex depreciation expenses and large investments in new manufacturing processes, before improving.

One thing that’s worth bringing up here off the bat is that Intel’s Q4 and 2022 top-line guidance (though a little better than consensus) implies its sales growth will significantly trail that of a chip industry in the middle of a giant upcycle. Q4 sales guidance implies a 3% annual revenue decline, while 2022 sales guidance implies sales will be up just 1% or so, after only rising 1% in 2021.

Though a portion of Intel’s top-line issues can be attributed to Apple’s (AAPL) migration away from Intel modems and PC CPUs in favor of Qualcomm (QCOM) modems and internally designed Mac SoCs, share losses to other clients also loom large — particularly for DCG, whose 2021 sales are forecast by Intel to be down by a low-to-mid single-digit percentage amid share losses to AMD (AMD) and (increasingly) Arm-architecture CPU designs among cloud service providers.

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Intel’s Q3 server CPU division performance. Source: Intel.

Frankly, even if one takes Intel’s comments about Chinese cloud pressures at face value, the 20% Q3 drop seen in DCG’s cloud sales is stunning in light of how strong U.S. cloud capex has been. AMD, whose Epyc server CPU sales have a strong cloud skew, has been reporting very strong Epyc growth in recent quarters and will likely do so again when it posts its Q3 report on Oct. 26.

Judging by the growth rates disclosed by each company for their PC CPU businesses, Intel has also been ceding some share to AMD in the Windows PC CPU market. The pending launch of Intel’s Alder Lake desktop and notebook CPU lines might give the company a reprieve in Q4, but with AMD reportedly prepping multiple PC CPU refreshes in 2022, the reprieve might only last a couple of quarters.

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Intel’s Q3 PC CPU division performance. Source: Intel.

With all of this in mind, what does the read-through from Intel’s report and call look like for its peers, customers and suppliers? I’d say that while it’s not entirely positive, there are more positives than negatives to be found.

First, although Intel did report seeing China cloud and enterprise server supply chain headwinds for DCG, it nonetheless reported 70% annual growth for DCG’s enterprise and government-related sales. Inventory builds and an easy annual compare helped out here, but that growth rate still acts as a fresh sign that enterprise server demand is rebounding well following a rough, pandemic-impacted 2020.

For the PC industry, Intel’s disclosure of a 5% annual drop in notebook CPU sales, together with its outlook for low-end notebook CPU sales to be pressured in Q4 as OEMs prioritize building high-end systems amid shortages for select components, is one more sign that the low-end notebook market is seeing inventory corrections due to a combo of component shortages and softer consumer/education demand.

But on the flip side, the 20% desktop CPU sales increase reported by Intel is an encouraging sign for how corporate PC demand is trending. And with a lot of high-end PC demand still unmet right now, Intel forecast the total addressable market (TAM) for PCs will grow again in 2022.

Meanwhile, the 54%, 16% and 39% growth rates reported by IOTG, PSG and Mobileye are positive signs for chip demand within end-markets such as edge servers, mobile infrastructure and ADAS. PSG’s performance, which Intel suggests would have been even stronger if not for major supply constraints, likely has some positive read-through for archrival Xilinx (XLNX) , which is set to be acquired by AMD.

Last but certainly not least, chip equipment makers have to be very pleased with Intel’s 2022 capex guidance, which according to Bernstein analyst Stacy Rasgon is net of any government subsidies Intel will receive. Together with aggressive spending plans from foundry giant Taiwan Semiconductor  (TSM) , memory makers and various suppliers of chips made using trailing-edge and specialty manufacturing processes, Intel’s outlook suggests wafer fab equipment (WFE) spend will be up strongly for the second year in a row in 2022.

While there’s understandably a lot of skepticism on Wall Street about Intel’s ability to achieve the long-term CAGR target it set on Thursday — Rasgon, who has had an “Underperform” rating on Intel for more than a year, went as far as to call the target “outlandish” — there’s no questioning CEO Pat Gelsinger’s willingness to spend aggressively (and depress near-term margins/profits in the process) to try and put his company’s CPU franchises on better long-term footing against AMD and Arm-architecture rivals, as well as to grow Intel’s nascent foundry business.

Between them, Intel’s sales, demand and spending disclosures explain why the shares of AMD, several major chip equipment makers and top Intel OEM client Dell Technologies (DELL) closed higher on Friday, even as Intel fell 11.7% and the Nasdaq fell 0.8%. Though markets now have a better appreciation of the enormous near-term challenges Gelsinger inherited when he became CEO in February, they also understand that near-term conditions look much brighter for many other chip industry names.

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