Should I Buy Intel After 'Disappointing' Near-Term Earnings Outlook?

Intel’s (INTC) fourth-quarter results were modestly ahead of our expectations but provided investors with a soft first-quarter forecast, with stronger-than-usual seasonal headwinds and inventory corrections in some non-core businesses.

With Intel’s stock up 45% in the past three months – versus a 15% rise in the Morningstar Global Markets Index – we suspect investors were seeking a brighter outlook, particularly in Intel’s foundry business and artificial intelligence (AI) accelerator pipeline. We’re not too stunned to see shares fall as much as 10% after hours. We keep our fair value estimate of $40 (£31.58) per share for Intel, and still do not see an attractive margin of safety for investors.

Revenue in the December quarter was $15.4 billion, up 9% sequentially and 10% year over year, and above the midpoint of guidance of $15.1 billion. Client computing, or CCG, performed well and beat management’s expectations, with revenue up 12% sequentially and 33.5% year over year, as PC demand rebounded from the severe post-Covid pause seen in prior quarters.

Revenue for the data center and AI segment was up 4.5% sequentially but down 7% year-on-year. Intel is still facing a negative wallet share shift wherein cloud customers are heavily investing in AI accelerators at the expense of traditional server processors. Higher sales and favourable mix and pricing enabled Intel’s adjusted gross margin to rise to 48.8%, up 300 basis points sequentially and solidly ahead of guidance of 46.5%.

In the March quarter, Intel expects revenue to fall to the range of $12.2 billion-$13.2 billion, which at the midpoint would represent 8% growth year over year but an 18% sequential decline. Lower revenue should cause the adjusted gross margin to fall to 44.5%. Intel expects growth both sequentially and year over year for the rest of 2024. But we don’t view this as a high bar, as both we and the market assume Intel will remain on the road to recovery in the long term.