Intel Reported Q3 2021 Earnings - Disappointment and Uncertainty

Intel (INTC) stock is down about 10% in pre-market trading today, after reporting mixed Q3 results and disappointing guidance and commentary yesterday.

Intel delivered EPS of $1.71, topping estimates' consensus of $1.11. Revenue came in at $18.1 billion, missing on the $18.24 billion consensus. CEO Pat Gelsinger blamed disappointing sales and demand on “the overall supply challenges of the semiconductor industry.”

Intel stock was further hit after the company warned its gross margin and free cash flow will decline over the next 2-3 years as a significant portion of generated revenues will be channeled towards new chip factories and R&D. 

For this quarter, Intel sees EPS of $0.90 on sales of $18.3 billion, which is shy compares to the analyst estimates of $1.01 EPS on revenue of $18.25 billion.

Morgan Stanley analyst Joseph Moore downgraded Intel stock to Equal Weight from Overweight and lowered the price target to $55.00 per share from the prior $67.00 on signaled capital spending increase.

“The situation is mixed, but ultimately the capital spending requires underwriting a growth forecast that seems challenging; the product pipeline is looking better after years of struggles, the quarter was ok (albeit with significant market share related weakness in cloud, and some supply related weakness in 4q, as expected), and while gross margin guidance for next year was worse than our expectations, we think it was in line with investor expectations - and will be largely offset by an accounting change where the company starts to proforma out $500 per quarter of stock based compensation, to keep non-GAAP numbers relatively intact,” the analyst said in a client note.

For Moore, the downgrade to EW was a “frustrating” call to make as the company is on the “brink of a product turnaround.”

“But we have consistently said that over $25 bn in capital spending would be problematic for us, and guidance for $25-28 bn "and higher in future years" puts the burden on double digit growth in 2023 and beyond - which the company also forecast - that seems challenging, particularly given our more cautious view on hardware demand overall,” Moore added.

Similarly, Mizuho’s Vijay Rakesh downgraded to Neutral from Buy and also introduced a new price target of $55.00 per share (from $70.00) on higher investments.

“We have been positive on INTC's ability to return to executing on its technology roadmap with new management. However, we now believe INTC's capital-intensive Foundry shift adds uncertainty to its likelihood of catching up to leading-edge by executing on its core PC/Server roadmap, and believe the GM reset to 51-53% (current 56%) over 2-3 years could be difficult to recover. INTC also set a 10-12% top-line CAGR target we believe could be hard to achieve given its recent historical CAGR of ~3%,” Rakesh wrote in a note sent to clients.

UBS analyst Timothy Arcuri also downgraded Intel from Buy to Neutral with a price target of $58.00 (from $73.00).

Who do they love? - Advanced Micro Devices

If you've been following us, you know our view that our favorite Advanced Micro Devices (AMD) is taking so much market shares from Intel that it's embarrassing. After the disappointing earnings report from Intel that sent its shares plunging, AMD's shares traded up 2%, making all time high. This is the market's agreement with our view, that currently AMD is a better horse than Intel in the race.

But don't be complacent - pre-earnings run-up can lead to disappointments

AMD is now back to all-time high, above the peak that it made in July. Back in July, as it made all time high, we sold half of our shares to realize a ~30% gain. We bought shares again on the way down in August-September, returning to a full position of 5% of our portfolio. Right now we're sitting on a 28% gain in our position, making it 7% of our portfolio, which is more than the 5% that we allocate to AMD. We think it's appropriate to take something off the table here for two reasons. 

First, AMD is set to report earnings next week on 26 Oct. Here's our playbook that we apply generally to stocks: usually when a stock runs up so much pre-earnings, expectations are high, we think chances decrease that the stock can go higher after earnings. If company delivers some unexpected good news, stock can get rewarded. If company just delivers mediocre, expected good news, chances are high that investors will see that the stock has had a nice run, therefore will look for reasons to sell. If company delivers unexpected bad news, stock will get severely punished. This is in converse to when the stock has been selling off into earnings, expectations are set low, so an unexpected small beat could be positive. For the case of AMD, we continue to believe company will deliver earnings beat; but market already expects this. Additionally, we hope CEO Lisa Su will announce status of the Xylinx acquisition; we think market is expecting good news. We're long-term believer in AMD and CEO Lisa Su, so we will look for any potential weakness after earnings as opportunities to buy. In order to do that, we have to have dry powder.

Second, at a portfolio-management perspective, it's only discipline to sell something when we've had a ~30% run. This de-risks the position if unfortunate things happen, and also leaves room to add to the position when it does come down. 

However, our portfolio has a unique case here. After the recent run-ups in Ford, General Motors, AMD, in addition to investments, our trading activities have brought us lots of profit (trading& investing gains of 70% in the past month). We now have some cash on the sidelines that we've not deployed yet. Therefore, what we're going to do is not sell any shares into earnings, but rather will take buying opportunities on the downside if that happens. Of course, we reserve the right to change our mind, if the position gets over-extended in a short period of time (for example, if AMD stock gains 5% just today, we'll definitely have to take something off the table).