INTC Earnings Preview: Can Intel turn it around?

Intel is set to report Q3 earnings on October 31 after the market close, with analysts expecting a loss of $0.02 per share and revenue of $13.02 billion. Investors will focus on several key areas, including the company’s gross margin impact from ramping up the Lunar Lake chip production, expected to create near-term margin headwinds due to outsourcing with TSMC. Additionally, Intel’s Foundry progress, especially its strategic initiatives around the 18A chip manufacturing process planned for next year, remains critical as it looks to regain competitiveness.

Intel's recently launched Xeon and Lunar Lake chips have garnered positive reviews, marking significant progress in Intel's server and mobile PC segments after years of lagging behind. The new Lunar Lake chip positions Intel to compete more effectively against Qualcomm in the laptop space, while the Xeon processors are making strides in the server market, even though competition from AMD’s upcoming Turin chips could temper Intel’s momentum. A structural highlight in Q3 will be updates around Intel Foundry, particularly as Intel is reportedly establishing the foundry as a separate subsidiary, a move seen as a step to alleviate conflicts of interest and attract more customers.

Analysts will also watch Intel's comments on long-term capital expenditures and gross margin guidance, as well as its progress toward strategic cost-cutting initiatives, including a $10 billion reduction plan and a 15% workforce reduction by year-end. The company's success in creating an independent Intel Foundry unit and securing recent wins with Amazon Web Services and the Department of Defense for custom chip production are also key developments, although near-term financial gains may be limited. There have been rumors about a potential acquisition by Qualcomm (QCOM), which could be the largest tech deal in history. While Intel's shares rose after this news, driven by a recent Foundry win with Amazon (AMZN), both Intel and Qualcomm face challenges, including Intel’s data center struggles against competitors like NVIDIA (NVDA) and AMD, and Qualcomm’s slowdown in the handset market. Although acquiring Intel could diversify Qualcomm's revenue and position it strongly in the PC market, Qualcomm’s existing momentum with ARM-based Snapdragon CPUs for notebooks presents potential strategic conflicts, and the regulatory hurdles of merging two tech giants could be significant. Additionally, Apollo Global Management (APO) expressed interest in investing $5 billion into Intel, suggesting confidence in Intel's manufacturing expansion. Despite potential upsides, a Qualcomm-Intel merger appears unlikely due to strategic and regulatory complications.

Intel recently clarified it has no plans to sell its majority stake in Mobileye (MBLY) after a Bloomberg report suggested otherwise, which had initially driven MBLY shares sharply lower. Intel’s commitment has since spiked MBLY’s stock back up, though the company faces ongoing challenges, including weaker FY24 guidance and declining orders from China, which have impacted its Advanced Driver Assistance Systems (ADAS) volumes. With MBLY’s struggles and a still-depressed stock price, Intel’s decision to hold off on a sale makes strategic sense, especially as it explores potentially more valuable options for its Network and Edge (NEX) business, which has shown stronger financial performance.

Intel’s Foundry business gained renewed optimism after securing a $3 billion contract with the U.S. Department of Defense and a substantial multi-year deal with Amazon (AMZN) Web Services to develop a new AI chip using Intel’s advanced 18A process. This progress aligns with Intel’s potential plans to restructure Foundry as an independent unit, which could attract more customers by reducing conflicts of interest with its competitors, with the possibility of a future IPO to create additional shareholder value. While Foundry’s backlog is expanding, Intel remains committed to becoming the world’s second-largest foundry by 2030, though competitive pressures from rivals like AMD and NVIDIA continue. Furthermore, Intel has paused new facility construction in Europe and is advancing its $10 billion cost-cutting strategy, including workforce reductions. These recent moves signal forward momentum for Intel’s Foundry ambitions despite ongoing challenges.

On September 15, Bloomberg reported that Intel, whose stock has plummeted by 60% in 2024, is set to receive up to $3.5 billion in federal grants through the Pentagon's "Secure Enclave" initiative to reduce reliance on foreign chip manufacturing. While this contract isn’t a transformative solution, it provides a much-needed boost for Intel's cash flow and top line amid significant financial struggles and competitive pressure from NVIDIA (NVDA) and AMD. Intel has already secured $8.5 billion in federal grants and $11 billion in loans via the CHIPS Act, yet faces a steep funding gap as it aims to raise over $100 billion for U.S. factory expansions. Amid rising operational losses, especially in its Foundry business, Intel has initiated substantial cost-cutting measures, including a potential 15% workforce reduction, a suspended dividend, and considerations of selling off non-core assets like its Mobileye (MBLY) stake. This government contract provides some relief for Intel, though it leaves broader competitive challenges unresolved.

Intel's Q3 report revealed disappointing performance, prompting downgrades from analysts due to continued struggles in several key markets, particularly in AI, data centers, and PCs. The company reported earnings of $0.02 per share, missing analyst expectations by $0.08, with revenue declining 0.8% year-over-year to $12.8 billion, roughly in line with estimates. Segment-wise, the Client Computing Group (CCG) grew 9% to $7.4 billion, but Data Center and AI (DCAI) revenue fell by 3%, and the Foundry business reported only modest growth, further highlighting the challenges Intel faces against strong competition from AMD and NVIDIA.

Intel's updated guidance was also below expectations, forecasting a Q3 loss of $0.03 per share, and revenue between $12.5 billion and $13.5 billion, versus the consensus of $14.43 billion. Facing profitability issues, Intel announced a significant $10 billion cost reduction plan to address structural inefficiencies, which includes a 15% workforce reduction, reductions in R&D and marketing expenses, and a 20% decrease in capital expenditures in 2024. This aggressive restructuring is aimed at building a more financially sustainable business while creating room for continued investments in technology and manufacturing leadership.

Another significant move from Intel was the decision to suspend its dividend starting in the fourth quarter of 2024, reflecting its cash preservation efforts amid the downturn. The dividend suspension, along with workforce reductions and lower capital spending, indicates Intel’s intent to redirect resources towards its strategic goals, including its ambitious five-nodes-in-four-years plan aimed at achieving technological leadership in chip manufacturing. However, analysts remain cautious about Intel's ability to execute its plans, especially as it struggles to regain market share lost to rivals in the data center and AI spaces.

Intel’s future depends heavily on the success of its restructuring and cost-cutting measures, alongside its potential to capitalize on upcoming product releases in server and AI segments. Still, with significant execution risks and an expanding technology gap with competitors, achieving a meaningful turnaround remains challenging.