Intel Falls On Q3 Results: 8 Analysts On Gross Margin Pressure, Manufacturing Challenges

Intel Corporation INTC shares are retreating to a one-month low following the chipmaker's lukewarm third-quarter results.

The Intel Analysts: BofA Securities analyst Vivek Arya downgraded Intel from Neutral to Underperform and reduced the price target from $60 to $45.

Benchmark analyst Reuben Roy has a Market Weight rating.

Rosenblatt Securities analyst Hans Mosesmann reiterated a Sell rating and lowered the price target from $45 to $40.

Mizuho Securities analyst Vijay Rakesh maintained a Buy rating and nudged the price target down from $63 to $60.

Needham analyst Quinn Bolton maintained a Hold rating.

Raymond James analyst Chris Caso reiterated a Market Perform rating.

UBS analyst Timothy Arcuri maintained a Buy rating and trimmed the price target from $67 to $62.

Morgan Stanley analyst Joseph Moore maintained an Equal-weight rating and reduced the price target from $61 to $56.

BofA On 3 Structural Issues: The weak results for the second half highlight three structural issues for Intel, Arya said: a lack of a plan to fix manufacturing challenges for next-gen 7nm; mix pressure; and increasing competition from nimbler fabless competitors. 

The mix pressure is a result of demand moving from Intel's profitable enterprise PC/server markets to more competitive cloud/consumer markets, the analyst said. 

Third-quarter data center revenue missed estimates by 4%, he said. 

"The uncertainty of roadmap execution could continue to erode INTC's 80-85% value share in PC/data center markets and constrain EPS growth," Arya said. 

Benchmark Blames Elevated Investor Expectations: The third-quarter results were above expectations, with strong trends in consumer notebook demand, Roy said in a note.

That said, the quarterly performance fell short of elevated investor expectations, the analyst said.

"While we view INTC's recent NAND business divestiture positively, we see limited near-term upside catalysts to shares in the context of gross margin compression and continued uncertainty regarding INTC's manufacturing roadmap," he said. 

Related Link: 4 Semiconductor Ideas Ahead Of Q3 Earnings

Rosenblatt Dissects Intel's Q3 Print, Guidance: Intel's third-quarter sales, though declining 7.1% quarter-over-quarter, exceeded the consensus estimates, Mosesmann said in a note.

The client computing group and internet of things saw sequential increases as opposed to the sequential declines witnessed in the data center group, non-volatile memory solutions group and programmable solutions group, the analyst said. 

A higher top-line, lower opex and higher other income helped bottom-line outperformance, despite gross margin compression, he said.

The gross margin contraction was due to a mix shift from enterprise and government to cloud, Mosesmann said. 

The fourth-quarter sales guidance of $17.4 billion baked in a low-single digit year-over-year decline in PC-centric business and a 25% drop in data-centric business, according to Rosenblatt. 

Mizuho On Intel's 7nm Roadmap, NAND Divestiture: A decision on 7nm foundry versus in-house will likely be made in December/January, depending on initial 7nm test/manufacturing results, Rakesh said, citing Intel.

The analyst said he expects the outcome to be a mix of in-house and foundry manufacturing.

The NAND divestiture to SK Hynix is likely to benefit gross margins by 100-200 basis points, he said. 

Needham Cautious On Intel Shares: Given the underperformance in the data-centric business, the gross margin miss and continued weakness in its NVM solutions group, IoT group and enterprise and government, Bolton said he remains cautious on Intel shares.

The quality of Intel's earnings remains troubled, the analyst said. 

Raymond James Says It's 'Difficult To Be Negative': Estimates for Intel have come down significantly on lower DCG expectations and the associated margin impact, Caso said in a note. 

"We still find it difficult to be too negative near-term due to widely negative sentiment and before details of the recovery plan are revealed," the analyst said. 

Intel urgently needs a plan to right the ship, he said. 

UBS Explores Reasons For Gross Margin Pressure: Rather than incrementally more aggressive pricing by Intel, the product and process mix are mainly responsible for gross margin pressure, Arcuri said in a note.

Additionally, many of Intel's new adjacent markets are below average corporate gross margin, the analyst said. 

On manufacturing, UBS said foundry will likely play a very big role for CPU manufacturing at both Taiwan Semiconductor Mfg. Co. Ltd. TSM 5nm and 3nm as Intel continues to work on its own process development. 

"This is a major lever to unlock value and should take shape in 2021 and to believe that INTC will not be a major innovator even if mostly fabless is to us, imprudent," Arcuri said. 

The analyst sees memory sales allowing the company to redeploy capital, potentially for M&A.

Morgan Stanley Says 2021 'A Difficult Year': The consensus should start coming down given Intel's low run rate, Moore said in a note. 

"2021 seems like a messy year, where we were 7% below consensus coming into this quarter," the analyst said.

In the long term, he said Intel is working to build a more solid foundation, adding that there are some proof points around the Tiger Lake launch.

INTC Price Action: At last check, Intel shares were trading down 11.3% to $47.81. 

Related Link: Mike Khouw Sees Unusual Options Activity In Intel

Photo courtesy of Intel.