Intel Corp. disappointed analysts with its short-to-mid-term targets at an investor day Thursday, and analysts collectively shook their heads at an “absurdly bullish” long-term forecast for which “stocks are priced in a short [to] no chance of success.
Shares fell 5.3% on Friday to close at $45.04, their lowest price since November 2020 after Intel provided a series of guidance for its expected recovery under chief executive Pat Gelsinger on Thursday after -midday. Intel ended the day with a market capitalization below $184 billion, less than rival Advanced Micro Devices Inc. AMD,
($185.24 billion), which surpassed its biggest rival by market capitalization for the first time in history this week.
Wall Street analysts have been unhappy with Intel’s declining gross margins lately as Gelsinger cuts profits to bolster manufacturing capacity. With its forecast on Thursday, Intel executives admitted it will be years before the investment bears fruit, although it met top analysts’ expectations for earnings in 2022. In response, seven analysts lowered their price targets, while two raised their targets.
The numbers: a forecast of $3.50 per share on revenue of $76 billion for 2022, compared to $3.42 per share for Wall Street on revenue of $74.99 billion before the event; gross margins of 51% to 53% until 2024, then 54% to 58% from 2025; negative cash flow of $1-2 billion in 2022 and expected free cash flow of 20% of revenue by 2026, and initial single-digit revenue growth to double digits by 2026.
The announcement that woke Wall Street’s ears, however, was another chip rollout delay – Intel’s 7-nanometer data center chip dubbed “Granite Rapids,” meant to succeed the Sapphire chip. Intel’s 10nm Rapids, was pushed into 2024 from 2023. This is reminiscent of Intel’s announcement in summer 2020 that its 7nm chips would be delayed, and summer 2021 announcement according to which Sapphire Rapids chips would be delayed.
Evercore ISI analyst CJ Muse, who has an online rating and a $55 target on Intel, said while the first year has been good for Gelsinger, there’s “still a lot of wood to cut. “.
Muse called the Granite Rapids delay “new news and additional negative” for Intel.
The analyst said investors are wondering if Intel can hold enough market share in data centers and graphics to achieve 10% to 12% growth by 2025 against competition from AMD and now from Nvidia Corp. NVDA,
as the GPU maker enters the data center processor business.
At CES in January, Intel announced the launch of its “Alchemist” graphics chip, effectively competing with AMD and Nvidia in this area.
Read: Semiconductor sales exceed half a trillion dollars for the first time and should continue to grow
Bernstein analyst Stacy Rasgon, who has an underperform rating and a $40 target on Intel, said that since a journey of a thousand miles begins with the first leg, Intel has at least another 999 to browse.
“In recent months, Intel has painted an increasingly bullish picture of how things are going over time, and doubled down at the company’s analyst meeting yesterday, setting an almost absurdly bullish tone about growth. they think they can achieve,” Rasgon said.
Bernstein’s analyst called implied revenue of $120 billion by 2026 “extremely bullish,” along with “$10 billion in GPU activity materializing from virtually zero today.”
“The mid-term outlook was an effective capitulation to the competition, particularly in data centers, with only mid-to-high single-digit growth for the next two years, below the market as they admit to anyone who share the losses, presumably to AMD, will continue for the time being,” Rasgon said.
Jefferies analyst Mark Lipacis, who has a holding rating and a price target of $48, said management was playing hard-handed. Lipacis noted that over the past three years, Intel has lost transistor leadership to Taiwan Semiconductor Manufacturing Co. TSM,
bled the data center share to AMD and Nvidia, and AMD and Arm Ltd. in PCs, sees big customers like Apple Inc. AAPL,
and Amazon.com Inc. AMZN,
manufacturing their own processors, and saw a 1,000 basis point decline in gross margins as well as a steady loss of x86 dominance.
“Given 1) Intel’s recent history of poor execution and 2) its own projection of zero FCF for the next three years, we believe investors will need to see tangible, concrete evidence that the huge investments made by Intel will be chargeable,” Lipacis mentioned. “We don’t expect that for at least a year.”
Cowen analyst Matthew Ramsay, who has an outperform rating and a price target of $60, said battleships take time to turn around, but Intel has plenty of ammunition, but at the same time, a lot to prove.
“Shares are cheap [to] no chance of success, an attractive entry point for those who can wait,” Ramsay said.
“More critical to the stock, it will be difficult to prove or disprove the full turnaround for some time, but we believe key customer reception at Sapphire Rapids in 2H22 will be an important early indicator,” Ramsay said. “Emerald Rapids being between Sapphire Rapids (2022) and Granite Rapids (2024) was something we had reported, but will likely be a target for bears.”
Susquehanna Financial analyst Christopher Rolland, who has a neutral rating and lowered his price target to $55 from $52, said Intel’s analyst day avoided a bearish case for the stock, but that it was “far from a bullish case”.
Regarding the Granite Rapids delay, Rolland said “for those listening to our conference calls, this was expected”, and was skeptical of Intel’s optimism.
“Overall, we were pleased to see Intel avoid the worst-case scenario [gross margin] scenarios, but [free cash flow] leaves a lot to be desired, and we think the high-level forecast is overly optimistic,” Rolland said.
For more: watch earnings results from Intel as well as Nvidia and AMD
Intel’s gross margin pressure has been a sticking point for more than six months now. Earlier in the week, analysts had expressed concern over Intel’s $5.4 billion bid to buy Israel-based chipmaker Tower Semiconductor Ltd. TSEM,
and the company’s already-squeezed gross margins due to capital expansion plans like Intel’s more than $20 billion to build a “mega-site” factory in Ohio, as well as $20 billion dollars for sites in Arizona.
Intel is now down 26.9% over the past year, like the PHLX Semiconductor Index SOX,
gained 7.6%, the S&P 500 SPX index,
added 11.9%, the tech-heavy Nasdaq COMP composite index,
fell 2.3%, and the Dow Jones Industrial Average DJIA,
— which counts Intel as a component — rose 9%.
Of the 40 analysts who cover Intel, nine have buy ratings, 22 have hold ratings and nine have sell ratings, according to FactSet data. After price target changes in response to Thursday’s event, the average target was $53.28, down from $54.37 previously.