Intel Downgrade After C-Suite’s Major Error
The ugly stick found Intel and I’m calling it a strong sell.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Oh, as investors and traders already know, the “ugly stick” is out and about this Friday morning.
The stick has been looking for victims and putting the hurt on everything, especially in the tech realm, that it can touch. Hurt most of all and for good reason, has been (yes, Sargefolio name) Intel (INTC). Intel is down more than 25% ahead of the U.S. open as I write.
The position is no longer a top-10 holding of mine, though I have not yet sold (nor bought) a share. I knew that I was going to be asked to cover the stock on Friday morning. I am not permitted to front-run my own articles as keyword reading algorithms do watch what I write and these articles can occasionally move markets. So, I must wait until my own words become public information. Imagine if I was famous. LOL.
Intel Reports
On Thursday evening, Intel released the firm’s fiscal third quarter financial results. They look pretty decent. For the period ended September 26, the firm posted an adjusted EPS of $0.52 (GAAP EPS: $0.60) on revenue of $16.513 billion. These top- and bottom-line results beat Wall Street’s expectations across the board. The sales print was good for annual growth of 20.5%. Adjustments were made, primarily for gains made on the mark to market valuation of escrowed shares.
CEO Lip-Bu-Tan commented in the press release:
“Our Q3 results demonstrate improving execution, meaningful progress expanding supply and continued advancement of our process technology. Despite near-term headwinds across the PC industry, demand for our CPUs remains robust, reinforcing our confidence in the long-term growth opportunities for our business. Our immediate priority is to unlock additional supply to meet extraordinary demand for our Xeon family, while strengthening our product portfolio and roadmap.”
CFO David Zinser expanded on that negative tidbit of information that the CEO had touched on:
“We delivered another solid quarter. Revenue, gross margin and earnings per share exceeded guidance, including our strongest data center revenue growth in 15 years. Looking ahead, we see the PC slowdown continuing at least through the first half of next year, but we remain optimistic about the opportunities across our broader portfolio, and we will continue making disciplined investments in capacity and working capital to increase supply and support future growth.”
Operations
Really, who cares? We know that the firm’s fiscal Q3 was strong. No spit, Sherlock. That’s not why the shares are being taken to the woodshed overnight into Friday.
Fundamentals
Again, who cares? That said, cash flows will remain important. For the period reported, Intel generated operating income of $5.082 billion (+103%). Add to that net partner contributions of $847 million and $48 million in proceeds from government incentives. Out of that total, subtract capex spending of $4.219 billion (+43%) and $119 million in finance lease payments. That leaves free cash flow of $1.639 billion (+83%).
Segment Performance
Client Computing and Physical AI Group generated sales of $8.097 billion (-5% and missing expectations), producing a segment operating income of $2.285 billion (-15%).
Data Center and AI generated sales of $7.318 billion (+78% and beating expectations), producing a segment operating income of $3.039 billion (+215%).
Intel Foundry generated sales of $6.697 billion (+58% and beating expectations), producing a segment operating income/loss of -$1.853 billion (up from -$2.321 billion).
Guidance
Here’s where things went off of the rails on Thursday night. I am still processing just how awful this guidance is. As I expressed in my Market Recon column on Friday morning, I still can’t believe that Lip-Bu-Tan and Zinser somehow thought it was OK to not warn investors ahead of this release, that the current quarter was off to a terrible start.
Intel’s C-Suite grades out at an “F-” for this performance. It makes me think seriously about just being done with them. Where else are these two existing far below minimum competency requirements for their current titles?
For the current quarter, Intel sees revenue at $15 billion to $16 billion. Wall Street was looking for something close to $17.1 billion, so this is a monumental miss. Adjusted EPS for the current period is projected at $0.25. Wall Street was looking for roughly $0.45. In fact, the lowest estimate that I can find for Intel’s fiscal Q4 among 35 analysts is $0.32. One poor jerk was up at $0.76. Somehow, this horrendous miss did not warrant a warning.
The Hammer
Intel expects the global 2026 PC unit total addressable market (TAM) to decline by approximately 12% compared to the previous year. They noted that the second half of 2026 is experiencing a steep drop in demand, with units down more than 20%. Don’t blame me. I had to buy a computer to stay in business while I was stranded in Nevada for most of October. That computer has high-end Intel processors inside.
The company is planning for the 2027 PC unit TAM to shrink by an additional 10% on top of that 12% decline for 2026. Intel stated they do not expect a sustained market recovery until memory availability normalizes near 2028. Yikes.
Opinion
Memory prices are out of control. As we see above, Intel’s Data Center business is carrying the firm. Data center builders paying up for memory. Intel has now positioned its PC business as a casualty of those high memory prices. As we learned earlier this week, SK Hynix (SKHY) expects the high-end memory shortage to last into the calendar year 2023. In my opinion, this makes Intel a long-term “non-buy.”
Readers will see that INTC has fallen completely out of bed. The stock has lost its 200-day SMA in grand style, forcing professional portfolio managers to abandon ship. The inverse head-and-shoulders pattern of bullish reversal that I had drawn up for you previously did work. The stock traded above $127 in September. I just did not realize, in real time, that the party was over.
I am officially downgrading INTC to a strong sell. That said, I may remain long the stock for a little while as I will have to finesse my way out of this one. I generally do not take the “bull in a china shop” approach that so many portfolio managers now do in this modern era after having replaced their professional floor traders with algorithms.
What I may do is add some Advanced Micro Devices (AMD) on Friday. That stock is down 9% in sympathy with INTC and CEO Lisa Su has not yet warned despite the fact that AMD also has a large PC-driven CPU business. I have to believe that Su is a bit more market savvy than Lip-Bu-Tan. I think she would have warned if she had to.
At the time of publication, Guilfoyle was long INTC and AMD equity.
