Intel Sets A Low Bar With Disappointing Guidance

Betsy Van Hees of Loop Capital said Intel Corporation INTC have set a low bar for the next three years with disappointing margin guidance, as it is positioning itself for long-term growth by diversifying away from PC business.

Inte's Outlook

Intel expects its gross margin to decline modestly over the next three years, due to expectations for higher revenue growth in memory, modems and adjacent products. However, it would remain in the top half of historical range at 63 percent.

The chip giant also cut its DCG (DataCenter Group) operating margin outlook to the low- to mid-40 percent range from prior range of 45 to 50 percent over 2017 to 2021.

Intel also guided CCG (Client Computing Group) to decline low-single-digits with new businesses to increase double-digits resulting in overall revenue increasing low single-digits over the next three years.

“We came away from INTC's investor meeting incrementally more confident that INTC is making the right "big bets" for the long-term growth of the company and reiterate our Buy rating and $42 price target,” Van Hees wrote in a note.

The DCG margin cut guidance reflects Intel’s ramp DCG products first on its next process technology rather than at CCG traditionally, and higher expected mix of non-processor sales within DCG, which carry lower margins.

As a sign of diversification, Intel expects its traditional PC CPU TAM (total available market) to drop to about $30 billion in 2021 from $32 billion in 2016 and data center to increase to $65 billion from $13 billion in 2016.

Analyst Day Takeaways

 Other highlights of the analyst day include:

• Intel’s TAM should grow to $220 billion in 2021 from $45 billion in 2016.
• Intel will invest more in DCG and IoT chips.
• Intel is confident that it has a three-year manufacturing lead over competing foundries.
• Intel to ship its first 5G modem this year on 14 nm, and expects shipments in the millions in 2018.
• Intel also expects 14 nm LTE modem shipments in the tens of millions in 2018, which implies retention of share at Apple Inc. AAPL at a minimum.

At last check, shares of Intel were down 0.62 percent to $35.24.