Intel Analyst Plays Down Beat-and-Raise Quarter Amid Caution Over Second-Half Fundamentals

Intel Corporation INTC reported forecast-beating results for the second quarter Thursday and issued an upbeat forecast for the third quarter and fiscal year 2019.

The Analysts

KeyBanc Capital Markets analyst Weston Twigg maintained a Sector Weight rating on Intel.

Benchmark Company analyst Ruben Roy maintained a Hold rating on the stock.

KeyBanc: Low Growth Opportunity In Near-Term

The strength in client computing catalyzed above-consensus second-quarter results for Intel, with upside stemming from a pulling forward of customer purchase ahead of tariffs, strong commercial demand and product mix, Twigg said in a Friday note.

The company sees a slight uptick in the PC total addressable market in 2019, the analyst said.

Twigg forecast robust second-half growth in the data center group, comprising cloud and communications, the client computing group and IoT.

On the flip side, weak memory prices and soft enterprise demands remain headwinds, he said.

The $500-million upward adjustment to the 2019 revenue guidance and the 5-cent hike in the EPS guidance are already reflected in the second-quarter guidance, the analyst said.

KeyBanc lowered its fourth-quarter revenue estimate by about $1 billion.

Regarding Intel's move to sell the majority of its 5G smartphone modem business to Apple Inc. AAPL for $1 billion, Twigg said the company expects to record an after-tax gain of about $500 million on the divestiture in the fourth quarter.

Intel will continue to sell 4G modems to Apple, he said.

KeyBanc lowered its 2020 EPS estimate, reflecting gross margin pressure through 2020 as Intel ramps 10/7 nm and NAND memory continues to be a drag.

"We view Intel as a low-growth opportunity in the midterm (3% in 2020), but with high cash generation and strong shareholder returns," the analyst said.

Benchmark: Second-Half Guidance Could Prove Conservative

The results and outlook were a positive surprise, but the second-half guidance could prove aggressive, especially amid the competitive landscape and macro-related headwinds, Roy said in a Friday note.

Intel indicated in its guidance that it expects third-quarter data-centric and PC-centric revenue to be down in the mid-single digit range, and the company expects its operating margin to contract 500 basis point year-over-year to 35%, the analyst said.

The gross margin is also expected to decline, as expected, reflecting the 10nm ramp and adjacency business, he said.

Notwithstanding the raised full-year revenue guidance, the figure is still well below the $71.5-billion outlook the company initially provided for 2019, Roy said.

The 5G modem divestiture was widely expected and is a positive in the long term as Intel shifts the focus toward data-centric end markets, according to Benchmark.

Loup: 4 Reasons Why Apple Wants 5G Business

The 5G modem purchase by Apple is in line with Apple's strategy of owning the technology behind the products it makes, according to Loup Ventures.

The vertical integration strategy gives the company greater control over product innovation and marketing, the venture capital firm said.

If the deal goes through, Apple isn't likely to use the industry-standard QUALCOMM, Inc. QCOM modem, thereby gaining an industry advantage of lower power usage, Loup said.

Apple can roll out its own 5G modem only by mid-2022, two years after the debut of its first 5G phone, which is expected in the fall of 2020, the venture capital firm said.

The move also helps Apple save about $2 billion in licensing fees paid to Qualcomm, increasing its gross margin by about 1%, Loup said.