Intel: Worrying, And Potentially Lucrative
Contributor since 2011 / 26094 Followers
Summary:
- Intel faces significant challenges with declining sales, losses, and increasing debt, exacerbated by delays in product development and tough competition.
- Intel is implementing drastic cost-cutting measures, including eliminating dividends and reducing expenses, in an effort to turn around its struggling business and improve competitiveness.
- The jury is still out, as the focus should really be on execution, with the range of possible (shareholder) outcomes being quite wide.
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Intel Corporation (NASDAQ:INTC) is arguably among the most discussed stocks following a bombshell report, outlook, and subsequent reaction in the share price last week. These latest developments are not only disappointing from an earnings perspective, but also because the balance sheet concerns come more into play as well now.
The woes of Intel have been well-documented and lasting, starting in 2020, and likely even before. At the time, Intel announced the delay in its 7nm product line up, opening the way for Advanced Micro Devices (AMD) and others to gain relevance and market share. Recognizing the woes, Pat Gelsinger was re-hired in 2021, but the road to a recovery was long and tough.
These headwinds resulted in lower earnings at the worst time. This was just when Intel was on the verge of needing to make massive capital spending requirements in various areas, not just to catch up with peers, yet to develop new capital-intensive technologies as well.
A Tough Road
When the woes started around 2020, when the company was still generating nearly $80 billion in peak sales while posting net profits of around $23 billion. Moreover, net debt was very modest, as the business largely operated with a flat net debt load.
The real shortfall in the results was seen in 2022, when sales fell 20% to $63 billion, yet earnings were down 60% to $8 billion. Lower earnings, continued dividends and investment made into the business made that net debt rose to $14 billion, while the IPO of Mobileye (MBLY) provided a liquid stake in a once promising asset as well.
Revenues fell another 15% in 2023 to just $54 billion, as GAAP operating profits came in flat, with net debt having increased to $24 billion, as capital spending in 2023 totaled $25 billion, roughly three times the depreciation expenses of the business!
Worse, the company guided for first quarter sales to come in at a midpoint of $12.7 billion. While this would be up a billion from the same quarter in 2023, it marked a considerable pullback from a $15.4 billion revenue number in the final quarter of 2023. This, despite the AI craze being in full swing, but Intel was unable to effectively compete in this.
Moreover, shares of Mobileye plunged at the start of the year, reducing Intel’s effective capability to reduce debt by selling off its shares in this business.
A Great Plunge
Shares started the year in the mid-forties, fell towards the $30 mark over the summer as the latest earnings report sent shares down to just $20 per share, the lowest price in about a decade’s time.
After the company posted first quarter sales in line with expectations, it guided for second quarter sales to come in around a midpoint of $13.0 billion, with adjusted earnings seen at ten cents per share. In August, it became apparent that second quarter sales fell by a percent to $12.8 billion, coming in just below the midpoint of the guidance. The problem was really seen on the margin front, as adjusted earnings came in at just two pennies, falling way short of the guidance. Worse, GAAP losses were reported at $0.38 per share, equal to $1.6 billion in absolute dollar terms.
The company ended the quarter with $29.3 billion in cash, equivalents and short-term investments, that is excluding equity investments valued at $5.8 billion. The issue is that while liquidity is good, total debt has risen to $53.0 billion here, for a net debt load of $24 billion in what seasonally is a stronger quarter from a cash flow generation perspective. Moreover, the company is paying for some cash outflows with dilution as well, as the company’s share base increases by nearly 2% per annum here.
Besides, the contribution of the revenue base is worrying. The client computing group, comprised of desktop, notebook, and others, was up significantly, with datacenter & AI revenues actually down. Furthermore, Mobileye and Altera have seen a very tough quarter as well, as Intel’s growth engines are actually the detractor to the results here.
The Problem — The Outlook
The real issue for Intel is the outlook, with third quarter sales seen around $13.0 billion. The issue is that gross margins are seen at just 38%, which should result in adjusted losses of ten pennies, suggesting sequential declines after adjusted gross margins came in at 38.7% in the second quarter.
Trying to address this, Intel announces a major reorganization, as it is cutting its headcount by 15% while resizing and refocusing the business. Furthermore, this involves the elimination of the dividend per the fourth quarter, reducing annual spending by just over $2 billion. The company aims to save $10 billion in 2025 compared to its previous estimate, comprised of a reduction in operating expenses and reduction in capital spending.
Non-GAAP R&D, marketing, general and administrative expenses are set to come in at around $20 billion in 2024, and are earmarked to fall to $17.5 billion in 2025, with further expense declines seen thereafter. Gross capital expenditures are seen at $25-$27 billion this year, set to fall to $20-$23 billion next year. Net capital expenditures for Intel itself are much lower, due to offsets and partner contributions.
What Now?
With the company eliminating the dividend in its entirety, to save just over $2 billion per annum, it is evident that all registers are open to address the company’s situation, on top of the $10 billion opex/capital saving plan for 2025.
The issue is that of the guidance as gross margins of around 38% are down over 7 points from last year, and down from even historical ranges in the 60s, before Intel’s outsourced all its production. The in-sourcing is actually hurting the business now, due to underutilization of capacity in the foundry business as well as projects being under construction.
In fact, this segment is responsible for a near $3 billion loss on just over $4 billion in revenues. This suggests that the remainder of Intel is still profitable here, as the improvements will not be seen in the third quarter, but perhaps thereafter as the job cuts kick in and hopefully demand for its capacity will increase.
Then again, it is evident that Intel acknowledges that the problems are serious, as the market valuation has fallen well below the $100 billion mark, with the current enterprise valuation coming in around $110 billion here. This values the business at effectively 2 times sales, while its smaller peer in the past: AMD, now commands a >$200 billion valuation, at nearly 10 times sales.
The company is making drastic moves to improve its competitive basis, but it really is up to the business to start performing now. However, the combination of plenty of liquidity, drastic measures taken, and political relevance to the US, mean that Intel Corporation is not knocked out yet.
Quite frankly, this might be a kitchen sink quarter, as this might warrant a small speculative stake, with the focus on speculative, after expectations have been reset considerably.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Contemplating initiating a small speculative position.
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