Analysts Weigh In On Intel Following Guidance Update

Intel Corporation (NASDAQ: INTC) shares dropped 5 percent Thursday after the company issued a cautious guidance update during a presentation to analysts on Wednesday. Intel said its transition from PCs to higher-growth fields such as logic, memory and data centers will eat into margins over the next several years.

Intel said analysts can expect gross margins to drop to between 57 percent and 60 percent as Intel takes on rival Advanced Micro Devices, Inc. (NASDAQ: AMD) in offering 7-nanometer chips. In addition, Intel said it expects revenues to grow at a “low single-digit” pace for the next three years as it transitions its business.

Several analysts have weighed in on Intel following the guidance update. Here’s a sampling of what they had to say.

Margin Headwinds

Wells Fargo analyst Aaron Rakers said the negative market reaction is justified given Intel’s disappointing margin outlook.

“Although Intel positively highlighted an accelerated 10nm-to-7nm roadmap (7nm production in 2021), we don’t think the company’s commentary appeased concerns over increasing competitive dynamics (e.g., TSMC’s comparable 5nm productionscheduled to commence in 1H2020; AMD’s positioning of 7nm Rome EPYC),” Rakers wrote.

BMO Capital Markets analyst Ambrish Srivastava said semiconductor stocks have historically not performed well during periods of margin contraction.

“While the company provided plenty of details around factors that are important to us such as narrowing the gap between FCF and EPS, capital allocation, and OM (32%), the commentary around the lowering of GM to a range of 57%-60% leaves us with a discordant note,” Srivastava wrote.

Market Share A Top Priority

UBS analyst Timothy Arcuri said the margin guidance cut suggests Intel is prioritizing holding onto its CPU market share.

“By leaving room for ~300bps GM compression this seems to imply some price aggression in an attempt to stave off CPU share losses to AMD,” Arcuri wrote.

Bank of America analyst Vivek Arya said Intel still has an attractive valuation and is projecting double-digit free cash flow growth even at lower margins.

“What in our view was lost was management’s focus drive to a double digit FCF model, optionality to divest memory, and manufacturing getting back on track,” Arya wrote.

MKM Partners analyst Ruben Roy said Intel is clearly focusing on gaining market share in an expanding total addressable market.

“Consistent with the company’s messaging over the past several quarters, INTC continues to see its evolution to a data-centric market focused company from a PC-centric company as a driver towards market share gains in a dramatically expanding TAM environment,” Roy wrote.

Ratings And Price Targets

• Wells Fargo has a Market Perform rating and $55 target.
• BMO has a Market Perform rating and $50 target.
• UBS has a Buy rating and $58 target.
• Bank of America has a Buy rating and $62 target.
• MKM Partners has a Buy rating and $55 target.

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