Intel: Prospects Worse Than They Appear

Core View - Intel's Q2 earnings report and guidance indicate significant challenges, including declining margins, weak revenue growth, and high capital expenditures, leading to aggressive cost-cutting measures and a shift in focus to future products like Panther Lake and Clearwater Forest [2][4][6][7] Financial Performance - Q2 revenues were in-line, but gross margin of 38.7% missed guidance by nearly 5%, resulting in EPS of $0.02 vs. guidance of $0.10 [2] - Q3 revenue guidance is flat, with gross margin guidance at 38% and a projected loss on a non-GAAP basis [2] - Data Center business (DCAI) is in serious decline, while Client Computing Group (CCG) is the only segment holding the fort [2] - Foundry business is highly inefficient, generating large losses and consuming tens of billions in capex, with competitiveness unlikely before 2026 [2] Margin Challenges - Q3 margins are under pressure due to unfavorable product mix, accelerated process moves, underutilization penalties, higher non-core business charges, and more competitive pricing [3] - Lunar Lake CPU, set for late Q3 launch, is expensive to produce due to TSMC-manufactured chiplets and integrated memory with 0% markup, further pressuring margins [3] - Intel has shifted its goal of achieving 60% margins to 2026 [3] Near-Term Guidance - Q3 guidance is weak, with modest inventory digestion in CCG and below-forecast trends in DCAI, NEX, Altera, and Mobileye [4] - Intel is expected to slip behind AMD in data center revenues in Q3, despite improved server demand [4] - Q4 revenue growth is projected at the high-end of a 0% to 5% range, with Gaudi 3 expected to contribute $500M in accelerator revenues in 2024 [4] Cost-Cutting Measures - Intel announced over 15% headcount reduction, comprehensive spending cuts, and suspension of dividends starting Q4 to reduce opex and capex [6] - The company may need to raise funds from the sale of Mobileye and Altera to de-lever its balance sheet [6] Future Prospects - Intel's hopes for recovery rest on the 18A process, with Panther Lake and Clearwater Forest products expected to launch in H2 2025 and reach high volume production by 2026 [7] - The 18A process is claimed to be comparable to TSMC's N2, but doubts remain about its competitiveness [7] - Any delays or missteps in the 18A process could lead to disastrous financial outcomes [7] Industry Context - Intel's struggles reflect its inability to adapt to the changing semiconductor industry, with a continued focus on fabs rather than product innovation [8] - The company has missed the GPU train, and its debt levels are becoming a concern, with the stock likely to face further declines [8]