Intel earnings: Layoffs and margin pressure could overshadow Mobileye IPO

Intel Corporation has to contend with this week’s earnings report, which was largely unannounced, a darker-than-expected PC market and rumored layoffs that will likely overshadow the Mobileye unit’s initial public offering.

Intel INTC,
The company is scheduled to report third-quarter earnings after the closing bell on Thursday, following reports that it plans a major round of layoffs close to its earnings announcement. More recently, it was closer to confirmation in a report in which Chief Executive Pat Gelsinger addressed employees via video that “targeted” layoffs were on the way. Santa Clara, Calif.-based Intel last announced a major layoff in 2016, when it cut 12,000 jobs, or 11% of its workforce, and reported quarterly earnings the same day.

Gelsinger reportedly told employees that “costs are too high and our margins are too low,” which will once again focus investors’ attention on Intel’s now chronic margin problems. Already, the CEO has had to backtrack on last year’s promise that margins would remain “comfortably above 50%,” as margins fell to 44.8% in the previous quarter, third-quarter margins were forecast at 46.5%, and the annual margin forecast fell to 49% for the year. And against this backdrop, rival Advanced Micro Devices Inc. Margins for AMD,
crossed 50% for the first time and is expected to climb.

Susquehanna Financial analyst Christopher Rolland raised a question many have been asking amid all this downward pressure on several fronts: Why didn’t Intel announce earlier?

Earnings warnings about a decline in the consumer PC market have been issued for more than a quarter, as worldwide PC shipments are expected to suffer their steepest decline on record, which will hurt AMD, Nvidia Corp. To chip makers like NVDA,
Micron Technology Inc. MU,
and Applied Materials Inc. AMAT,
Not only because of weak PC sales, but also because the US has expanded its restrictions on advanced technology to China, reducing their outlook.

Read: PC market in ‘sharpest’ decline since data collection began in mid-1990s, analysts agree

Intel did not pre-announce, as it did not in the last quarter, before announcing a big loss from its forecasts and analysts’ expectations. Rolland, who has a negative rating on Intel, expects earnings to come in at the low end of expectations, given that “CEO Gelsinger has already clearly telegraphed weakness.”

Now forecasting a 17% year-over-year decline in PC shipments for 2022, Rolland said, “However, we believe 4Q will remain at significant risk as our mid-quarter audits deteriorate of late.” taking into account utilization, we are lowering our GM estimates for the full year from their estimated 49%”.

Read: Chip stocks fall to two-year low as more tech, artificial intelligence ban on China adds to woes

Regardless, investors will want to know if Chief Financial Officer David Zinsner’s forecast for the third quarter is a “financial bottom” for the company.

What to look for

Earnings: An average of 29 analysts polled by FactSet expected Intel to post adjusted earnings of 34 cents a share, compared with forecasts of 35 cents a share, well below the Street’s expectation of 90 cents when the quarter began, and $1.71 a share in the prior period. reported. Estimize, a software platform that crowdsources hedge fund managers, brokers, buy-side analysts and others, is calling for adjusted earnings of 46 cents a share.

Income: Wall Street expects Intel to earn $15.35 billion, based on Intel’s forecast of about $15 billion to $16 billion, according to 29 analysts polled by FactSet. That’s down from the $18.95 billion the Street was expecting at the start of the quarter and the $18.09 billion reported last year, and is likely to mark the ninth straight quarter of annualized gains. Estimated revenue is $15.43 billion.

Breaking down the segments, analysts polled by FactSet expect revenue from customer billing to be $7.58 billion; data center and AI group revenue of $4.67 billion; “network and edge” revenue of $2.4 billion; and Mobileye’s revenue was $472.2 million.

Stock movement: Speaking of a possible ninth straight quarter of earnings, even if Intel beat expectations — as it usually does — shares fell after the company’s last nine quarterly earnings reports.

In the quarter ending in September, Intel’s share price was up 31%, the Dow Jones Industrial Average DJIA,
– which counts Intel as a component – 7%, S&P 500 index SPX,
Down 5%, the tech-heavy Nasdaq Composite Index COMP,
4% down and the PHLX Semiconductor Index SOX,
decreased by 10%.

What analysts say

Bernstein analyst Stacy Rasgon noted that there are two reasons why the company is moving ahead with a lower-than-expected valuation for Mobileye MBLY, which is “not very encouraging from an Intel perspective.”.

Last week, Mobileye estimated its IPO would be priced between $18 and $20 a share, valuing the self-driving car technology company at $15.9 billion, coincidentally Intel’s 2017 valuation of Mobileye at $15.3 billion. billion dollars is the same as what it paid to buy in cash. . Mobileye filed for an IPO in late September and reportedly sought a $30 billion valuation for the company, well below previous estimates of $50 billion.

“As we all know, high-growth tech stocks have been decimated by a combination of weaker macros and higher rates, and the IPO market itself has stagnated in recent months,” Rasgon said. “But going ahead with an IPO at whatever price (whatever that sounds like) they can get now shows that Intel still believes that now is better than waiting.”

“Secondly, Intel will get some cash from the deal (~$3.5 billion in dividends from Mobile and ~$900 million from selling Moovit assets to them) and they need cash the way their business is trending right now.” Rasgon said.

Read: AMD unveils November 3 announcement while Nvidia, Intel gaming cards go on sale

Wedbush analyst Matt Bryson, who has an underperform rating on Intel, asked in a note whether Intel’s latest guidance “assumes a less bleak PC backdrop (down about 10%) for the fourth quarter and 2023.” asked if he had reduced his figures enough for “. /Y)) became more realistic.”

Looking at Intel’s data center business, Bryson said he sees additional risk to his assumptions that there will be some growth in enterprise revenue in the fourth quarter, “especially with AMD’s share gains.” [that] it also puts pressure on Intel sales.

“And as we look to next year, we have the same question given the macro headwinds, and we believe AMD could see the stock’s turnaround accelerate amid Intel’s battle with Sapphire Rapids,” Bryson said.

Of the 36 analysts covering Intel, seven have a buy rating, 20 have a hold rating, nine have a sell rating and the stock has an average target price of $33.58, down from $47.26 a quarter ago. to FactSet data.

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