Intel (INTC, Financial) has seen better days in its business and its shares. The company recently released its earnings results for the first quarter of 2023, in which it stated that “Q1 beat expectations on the top and bottom line despite navigating through global challenges." The company also said it is expecting modest recovery in the second half of the year. And yet, that was overshadowed by dramatic year-over-year declines on the top and bottom lines.
Can Intel finally deliver on its promises to reach rock bottom soon and then stage a comeback? I believe that the business narrative is not so optimistic now and Intel shares look far from being considered attractive. The recent earnings report showed plenty of fundamental metrics that are in bad shape and need to be fixed before an investment case can be made.
Lackluster 1st-quarter earnings
Starting with a trend analysis in revenue, Intel reported a 36% year-over-year decline in revenue to $11.7 billion in the first quarter of 2023. This decline is worrisome for two main reasons. First, Intel reported the largest quarterly loss in its history, with a GAAP loss per share of $0.66. Secon, the company reported a decline in revenue in the past three out of four quarters. In the only quarter in the trailing 12 months did Intel report growth, and even then the gain was an anemic one, only 0.11%. On the contrary, the declines for the other four periods have been steep at -16.45%, -8,45% and -16.57%.
Intel did beat analyst expectations for the first quarter of 2023 as the loss per share of 4 cents on a normalized basis was less than the 15 cents per share loss expected, and revenue of $11.7 billion was higher than the $11.04 billion expected. This is only one piece of financial analysis to consider on the optimistic side of Intel. On the pessimistic side, the trend analysis of some key financial metrics reveals the is a deep problem in Intel’s business model.
The GAAP gross margin declined to 38.4% from 50.4%, the diluted GAAP loss per share widened to 66 cents compared to a gain of $1.98 a year ago, and what is most worrisome to me is that Intel reported a decline in revenue in almost all of its business segments. This is an undeniable red flag.
The Data Center and AI (DCAI) segment declined the most, down 39% year-over-year, generating $3.7 billion in revenue. The Client Computing (CCG) segment declined by 38%, producing $5.8 billion in sales. The Network and Edge (NEX) segment declined 30%, bringing $1.5 billion to Intel. The Intel Foundry Services (IFS) segment declined 24% year-over-year to $118 million.
The only shiny exception was the Mobileye segment, which has increased 16% year-over-year to $458 million.
A weak outlook is not inspiring hope
The bad news doesn't stop there. For the second quarter of 2023, Intel anticipates revenue in the range of $11.5-$12.5 billion, a decline of 22% year-over-year, and it also expects gross margin to be 37.5%, down 7.3 percentage points year-over-year. Lastly, it expects a loss per share of $0.04, a huge decline of 114% year-over-year.
Intel is facing the full spectrum of risks in the semiconductor industry
The semiconductor industry faces several risks that can impact business operations and performance. I believe Intel is facing a wide variety of its industry risks at the moment, primarily supply chain, capital expenditures (related to re-entering the fabrication business) and losing its competitive edge.
The semiconductor supply chain is complex and global, with various components and materials sourced from different regions. Disruptions in the supply chain, such as natural disasters, trade conflicts, or geopolitical tensions, can lead to shortages, delays in production and increased costs. The demand for semiconductors is highly cyclical and influenced by factors like consumer spending, economic conditions and technological advancements. Fluctuations in demand can create challenges for semiconductor companies, especially if they have excess capacity during periods of weak demand or face supply shortages during high-demand periods.
The semiconductor industry is characterized by rapid technological advancements and constant innovation. Companies must continuously invest in research and development to stay competitive and meet evolving customer demands. Failure to keep up with technological advancements can lead to the risk of product obsolescence and loss of market share. Competitors may introduce new products, technologies, or pricing strategies that can erode market position and profitability. Companies need to differentiate themselves through innovation, quality and cost efficiency to maintain a competitive edge.
Semiconductors involve complex designs and technologies that are protected by intellectual property rights. There is a risk of infringement by competitors or other entities, which can result in legal disputes, financial liabilities and damage to a company's reputation. I don't think this is a particular risk for Intel at the moment, though, seeing as how it has fallen behind the competition, which is slowly eroding its market share.
Intel could also potentially face additional risks related to geopolitical factors and environmental and sustainability concerns. Geopolitical factors, such as trade disputes, tariffs, sanctions, or political instability, can significantly impact the semiconductor industry. Increasing attention to environmental sustainability and regulations aimed at reducing carbon emissions and waste can pose challenges for semiconductor companies as well. Adapting to sustainable practices and investing in green technologies can mitigate these risks. However, with its investments in the chip fabrication business, I think Intel may have underestimated how many more regulations the U.S. has compared to China when it comes to protecting the environment, ensuring clean drinking water, reducing toxic waste, etc.
