Squeezed by the ongoing chip shortage, Intel [INTC] warned in July that, while the worst should be over by the third quarter, it will take a year or two for the industry to catch up with demand.
“We expect supply shortages to continue for several quarters, but [they] appear to be particularly acute for client [CPUs] in Q3,” George Davis, the company’s CFO, said on the second quarter of 2021 earnings call.
The chip crunch has weighed the Intel share price down recently. Having hit a 52-week high of $68.49 on 12 April, the stock has struggled for momentum over the last six months and closed on 15 October at $54.46, 15.2% lower. The Intel share price has gained 11.4% since the start of 2021 and is up 3.8% over the past 12 months.
Intel's expected revenue, a would-be 5.4% year-over-year increase
Yet even though the chip supply crisis has been a drag on the Intel share price, CEO Pat Gelsinger expects the total addressable market for personal computers (PCs) to grow in 2022, especially due to a sharp increase in household demand. In addition, the company stated on its second-quarter earnings call that its partners are shipping a million PC units a day.
What can investors expect when Intel reports its third quarter of 2021 earnings on 21 October?
Intel hopes to grow revenue despite chip crunch
Intel expects to post $18.2bn in revenue in its upcoming earnings report, which would be a 5.4% year-over-year increase. The company also raised its full-year guidance by $1bn to $73.5bn, and it has forecast full-year earnings per share to be $4.80.
The ongoing chip crunch and components shortage isn’t a good indication that Intel will be able to meet customer demand in the three months to the end of December. These constraints are expected to be reflected in the numbers for its client computing segment, which is the company’s biggest and best performer. The segment is still expected to report positive year-over-year growth.
The supply constraints are likely to be a headwind for non-GAAP gross margins, though, which are forecast to be 55%, down from the 59.2% reported in the second quarter. Costs associated with building chips with its 7-nanometer process technology will have had an impact on these margins as well.
According to Zacks, the consensus among analysts is for the company to post earnings of $1.11 per share on $18.4bn revenue. This would be closely in line with what Intel reported a year prior.
In a note to clients seen by Barron’s, Bank of America Securities analyst Vivek Arya reiterated an underperform rating for the Intel share price, with a price target of $52. This implies a downside of 4.5% from its 15 October closing price.
The reason for Arya’s bearish stance is that he’s concerned that a dependency on its personal computing segment could cause strategic challenges. “While 2020 and 2021 were anomalies, this market is very mature and typically a slow or no-growth industry, a particular headwind to growth [Intel] since they don’t have [a] unique share gain story driving upside,” Arya wrote.
He also described Intel’s manufacturing push and ambition to be a foundry for other chipmakers as an expensive distraction.
The 33 analyst ratings issued for Intel are evenly split, with 11 analysts each recommending it as a buy, hold and sell.
“While 2020 and 2021 were anomalies, this market is very mature and typically a slow or no-growth industry, a particular headwind to growth [Intel] since they don’t have [a] unique share gain story driving upside” - Bank of America Securities analyst Vivek Arya
A supply-constrained environment
In the second quarter of 2021, Intel reported earnings of $1.28 per share on revenue of $18.5bn, up 2% year-over-year. These beat analyst expectations for earnings of $1.06 on $17.8bn revenue.
The client computing segment brought in $10.1bn an increase of 6% on year-ago sales. However, its data centre segment saw sales drop by 9% year-on-year to $6.5bn.
On the earnings call, Davis pointed out that comparisons for the data centre segment of its business were tough because the second quarter of 2020 was the segment’s best quarter in the company’s history. Gelsinger added that he’s hoping the demand for cloud services will see the segment return to double-digit year-over-year growth in the second half of 2021.
“We’ll be very competitive with that business. But it’s a supply-constrained environment overall, which is the similar case for the client [computing] business,” Gelsinger said.
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