Intel falls as investment weighs on earnings forecast

(Bloomberg) – Shares of Intel Corp. fell on Thursday after the company announced a disappointing profit forecast, fueling fears that CEO Pat Gelsinger’s costly turnaround plan could weigh heavily on the chipmaker’s financial performance.

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Earnings will be 80 cents a share in the first quarter, excluding certain items, Intel said Wednesday. Analysts were forecasting 86 cents per share on average. Gross margins are also tightening at Intel, once one of the most profitable companies in the industry.

Shares of the Santa Clara, Calif.-based company fell 7.4% in intraday trading in New York. Prior to the report, the stock had outperformed its chip peers this year.

Although demand for server chips is helping bolster sales, forecasts provide evidence that earnings are suffering from Intel’s spending spree. Gelsinger, who took the helm last year, has embarked on an ambitious plan to overhaul Intel’s manufacturing. That includes a new plant center in Ohio announced last week that could cost $20 billion. The hope is to restore Intel’s technological edge and avoid a growing challenge from Asian rivals.

“This is a big investment cycle for us as a company. This is good for Intel, this is critical for our industry and for our nation,” Gelsinger said in an interview with Bloomberg TV. “At some point, the street will see that we do exactly what we say.”

The company’s management faced a series of questions about its profit margins during a conference call with analysts. Participants asked for assurances that Intel is on track to restore the metric to historic levels above 60%. Gelsinger and new CFO Dave Zinsner reiterated that – although the company is currently spending heavily on new capacity and improving its production technology – the investment will pay off and eventually restore margins.

Intel’s chief financial officer said he was confident the company could deliver a gross margin – the percentage of revenue remaining after production costs are deducted – in the range of 51% to 53% this year. And within five years, the measure will be back to historic levels, Gelsinger said.

Investors have punished chip stocks this year, fearing the end of the pandemic corporate boom. But Intel was largely spared their wrath. As of Wednesday’s close, it was one of only two stocks in the Philadelphia Stock Exchange’s semiconductor index to post gains in 2022, along with Taiwan Semiconductor Manufacturing Co’s U.S. certificates of deposit.

The Intel CEO was also asked if he plans to sell part of the company’s programmable chip unit, a division based on its acquisition of Altera Corp. in 2015. Gelsinger responded that another spinoff already underway — from its Mobileye self-driving business — could serve as a model for other such deals.

Intel’s leader has only been in place for a year, which means he’s still dealing with the products and strategy shaped by his predecessors. Still, investors want to see evidence that his initiatives will help reverse market share losses and slow sales. Gelsinger, 60, argued that products launched in January had already restored Intel’s edge over rival Advanced Micro Devices Inc. But analysts still expect his company’s revenue to be flat in 2022, while AMD sales will increase by 20%.

Fourth-quarter sales rose 2.6% to $20.5 billion, beating estimates, fueled by demand for data center chips. Intel’s gross margin narrowed to 55.4%, excluding certain items. This is a cause for concern, although analysts were expecting an even bigger compression, to 53.6%. Earnings were $1.09 per share, beating the estimate by 90 cents.

Intel’s margins have generally declined to these levels in the past only when it faced increased levels of competition and was forced to aggressively price.

Revenue will be about $18.3 billion in the current quarter, Intel predicted, beating analysts’ average estimate of $17.7 billion. But there’s a troubling sign behind the sales growth: the company’s biggest data center customers are shrinking.

Even with the overall growth in sales of Intel’s data center processors, the major buyers of these chips – a group that includes Inc.’s AWS and Microsoft Corp. – decreased by 5% during the quarter. Companies like Amazon and Microsoft have developed their own chips, in an effort to reduce their reliance on outside vendors. Intel, just a few years ago, held over 99% of the server chip market.

In Intel’s customer business, which supplies processors to PC makers, revenue fell by about $800 million in the fourth quarter. Notebook computer sales decreased by 16%, while the desktop computer segment increased by 19%.

Intel blamed some of the lack of laptops on “ecosystem constraints” – in other words, manufacturers can’t get enough other parts, so they order fewer processors. As the pandemic winds down, there are fears that the overall PC market could fall back to previous levels. The push for working from home had fueled the demand for computers and other technologies.

On a more positive note for Intel, it continues to do well in the relatively new area of ​​communications. Telephone and Internet service providers are increasingly using its computer chips instead of more specialized equipment in their networking. Revenue increased 22% in the quarter.

(Updates with commentary from Gelsinger’s interview.)

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