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Like much of the tech sector, Intel Corp. is banking its future on strong growth in cloud computing, as the chip maker seeks to make up for lagging sales in its core legacy business amid stronger competition.
Intel is scheduled to report its first-quarter earnings after the closing bell Thursday. Results are expected to focus on growth in server and memory chips, businesses that are focused on supplying data centers powering the cloud, while masking continued declines in personal computer sales that cost Intel its title as the world’s largest chip maker in 2017.
Analysts expect client-computing, or traditional PC, revenue to decline 2% to $7.81 billion from the year-ago period, according to FactSet data. Data-center revenue is expected to grow 14.2% to $4.83 billion, and nonvolatile memory solutions revenue is expected to grow 9.8% to $950.5 million, compared with the year-ago period. “Internet of Things,” or IoT, revenue is expected to grow 14.3% to $824.3 million.
While Intel appears to be making bold strides into supplying cloud-based data centers with chips, but there are plenty of competitors vying for the space, especially as trends like AI and machine learning are requiring more creative approaches in the use of processing power. Stifel analyst Kevin Cassidy, who has a $53 price target on Intel, recently downgraded the stock to a hold given that Intel’s data-center shift comes up against technologies made by companies like Nvidia Corp.
“Intel has responded to these competitive threats with a series of acquisitions and a strategy for transitioning to data-centric from PC-centric,” Cassidy said. “We view this transition positively, however we are not convinced the Intel data-centric solutions are compelling enough to increase their share of the bill of material.”
The PC business may be hit even harder soon. In its more traditional business, Intel shares were challenged earlier this month following a report that Apple Inc. was moving to design and use its own chips in its Mac computers. RBC Capital Markets analyst Amit Daryanani said at the time that losing all of Apple’s Mac business would cost Intel about 20 cents to 25 cents a share in profit.
What to expect
Earnings: Of 31 analysts surveyed by FactSet, Intel on average is expected to post adjusted earnings of 71 cents a share, down from 72 cents a share expected at the beginning of the quarter. Intel forecast 65 cents to 75 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 75 cents a share.
Revenue: Wall Street expects revenue of $15.07 billion from Intel, according to 30 analysts polled by FactSet. That’s up slightly from the $15.03 billion forecast at the beginning of the quarter. Intel predicted revenue of $14.5 billion to $15.5 billion. Estimize expects revenue of $15.21 billion.
Stock movement: Intel shares are up 12% for the year, compared with a 0.2% decline in the PHLX Semiconductor Index and a 2% decline in the Dow Jones Industrial Average Shares rallied nearly 11% the day after Intel last reported earnings in January.
What analysts are saying
Instinet analyst Romit Shah, who has a buy rating and a $60 price target, said he expects cloud providers to provide a tailwind to data-center revenues as businesses are buying less for their own private centers. Shah said:
| [T]his sub-segment contributed 40% to DCG revenue in 2017, down from 55% in 2015, as corporations move workloads off premise to the Cloud (i.e. AWS). At the same time, Cloud and Comm. Service Provider grew 25% in 2016 and 28% in 2017 and now account for 60% of DCG revenue, up from 45% in 2015. This shift in customer mix has been dramatic, setting Intel up for better revenue growth, in our view. |
Evercore analyst C.J. Muse, who has an outperform rating and a $60 price target, expects a modest beat from Intel on the strength of data-center growth.
“The company is in the process of transforming itself into a data-centric business from a PC-centric one, and continues to rationalize its spending, winnowing down its investments to those that offer better returns and are more pertinent to its long-term goals,” Muse said.
RBC’s Daryanani, who has a sector perform rating and a $46 price target, not only sees Intel as challenged on enterprise sales but also points out additional competition from Advanced Micro Devices Inc. in data-center sales.
“Despite strong enterprise results in Q4 (driven by IT budget), we think enterprise longer term remains in secular decline given the trend toward third-party data centers,” Daryanani said. “We believe the competitive environment could become incrementally more challenging with Intel facing the full-year impact from AMD’s Epyc processor.”
AMD reports earnings after the closing bell on Wednesday.
Of the 40 analysts who cover Intel, 25 have buy or overweight ratings, 12 have hold ratings and three have sell or underweight ratings, with an average price target of $54.72, or 6% higher than Tuesday’s trading price.