Despite exceeding forecasts in the fourth quarter, Wall Street has slashed vertically integrated chipmaker Intel Corp (NASDAQ:INTC, ETR:INL)’s valuation, with shares in the Santa Clara big cap poised to open over 10% lower on Friday.
This is despite fourth-quarter revenues jumping 10% year-over-year to $15.4 billion, topping estimates of $15.1 billion, with earnings also trouncing expectations.
What gives?
Despite a strong quarter, the technology giant is bracing for a sharper revenue decline than initially anticipated in the following months.
In a Friday research note, Wedbush contended that this drop in sales is poised to exert considerable pressure on the company's earnings per share (EPS), as operational leverage diminishes.
The expected decrease in volume is set to affect utilisation rates and gross margins, while operational expenses grow in proportion to falling sales, analysts added.
Intel's management has attributed this softer guidance to several factors.
A key issue is a correction in customer inventories within its Mobileye and Programmable Solutions Group (PSG) segments, combined with a decline in Intel Foundry Services (IFS) and a cyclical downturn in the Integrated Manufacturing Services (IMS) sector, which are estimated to create around a $1 billion headwind.
“Having said this, we see near to intermediate-term results as less significant for Intel,” said Wedbush. “Rather, as we've noted for some time, the more meaningful barometer for Intel remains its ability to advance its manufacturing process and restore its ability to compete with TSMC.”
That is no small feat.
Market-leading foundry Taiwan Semiconductor Manufacturing Company (TSMC) is more advanced on a technological level than Intel, thus it remains the go-to foundry for Nvidia Corporation (NASDAQ:NVDA), Advanced Micro Devices Inc (NASDAQ:AMD, ETR:AMD), Apple Inc (NASDAQ:AAPL, ETR:APC) and every other major fabless designer.
Despite these challenges, Intel's management remains optimistic about the future, projecting that the first quarter of 2024 will mark the lowest point, with gradual improvements anticipated in subsequent quarters.
In the PC market, Intel has set modest growth targets, revising its expectations to low single-digit growth from the previously forecasted mid-single digits.
The company also highlighted its accelerator backlog, now exceeding $2 billion, though it does not match the jump observed in market expectations for its competitor AMD over the past three months.
“But, at the end of the day, it's necessarily Intel's successful ramp of (or struggles ramping) new parts on its future advanced manufacturing lines that will determine whether Intel indeed has restored process parity/leadership,” said Wedbush.
Theoretically, this should translate to beneficial costs of goods sold and higher foundry revenues.
For now, Wedbush remains on the sidelines with a neutral stock rating and a $40 price target against a $43.7 publication price.