Intel Corp. Shares rose on Friday for their best day since the start of the COVID-19 pandemic, after the chipmaker’s promised cost cuts and layoffs encouraged investors who have endured shrinking margins and market share over the past few quarters.
Compared to a 40% drop in the PHLX Semiconductor Index and a 20% drop in the S&P 500 Index SPX year to date,
Intel shares closed Thursday down nearly 50% for the year.
On Thursday, Santa Clara, Calif.-based Intel cut its full-year forecast again, citing “persistent macroeconomic headwinds,” forecasting earnings of about $1.95 per share and revenue of $63 billion to $64 billion. Wall Street had earnings of $2.20 per share on revenue of $65.3 billion. However, this was forgiven as Intel announced plans to cut costs by $3 billion in 2023 and $8 billion to $10 billion by the end of 2025.
Intel CEO Pat Gelsinger told analysts on a post-earnings conference call that the company is “aggressively” addressing costs, which includes “efforts to optimize our workforce” and efficiencies, particularly in its foundry business, Integrated Device Manufacturing 2.0, or IDM 2.0 .
While specific job cuts were not mentioned, Intel is said to be making the announcement on Nov. 1, according to a recent video provided by Gelsinger to employees. Intel last announced a round of major layoffs in 2016, when the company cut 12,000 jobs, or 11% of its workforce, on the day it reported quarterly earnings.
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Barclays analyst Blayne Curtis upgraded Intel shares in a note titled “As Pigs Fly,” saying “the ship isn’t right, but it’s time to shed our long-term underweight,” and raised his rating to equal weight. Curtis was candid about this:
“We see PCs bottoming out, and after two years of unrealistic optimism, price/caps are taking an important sobering step down,” Curtis said.
The Barclays analyst based the upgrade on the fact that Intel share losses are slower than feared during a PC market correction, that cost-cutting should help protect book value and that Intel’s domestic foundry footprint has strategic value if tensions between China and Taiwan arise. Taiwan Semiconductor Manufacturing Co. TSM,
and is home to most of the world’s chip manufacturing capacity.
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“The roadmap is still a big question mark, but the IDM 2.0 model ensures that better decisions will be made in terms of cost and time,” said Curtis. While data center share losses continued, making the entire segment unprofitable for the quarter, Curtis said the decline in share loss in the PC chip segment was “encouraging.”
“The ‘shock and awe’ spending cuts distract from the dire print,” Bernstein analyst Stacey Rasgon said in a note Friday. Rasgon has an underweight rating on Intel.
“Given the deterioration in business, Intel has embarked on a major program to take ~$3 billion from 2023. [cost of goods sold and operating expenses] and $8-10 billion by 2025 as they seek to stabilize their business finances, which would otherwise be on life support, and drive efficiencies to make their operating and wafer cost structures competitive over the longer term as they build IDM 2.0 and foundries. strategy,” said Rasgon.
“However, many questions remain; we don’t know the line of the cost reductions, nor the baseline, nor any revenue targets associated with them, nor the components especially on the COGS side, all of which make it especially difficult to write off savings for the year (and the foreseeable future). They simply serve to compensate for weaker business,” said a Bernstein analyst.
We can’t recommend Intel until we see a successful path to product and process leadership despite the “kitchen sink” guidance, Truist Securities analyst William Stein said in a note on Friday. Truist lowered his price target on Intel to $29 from $40.
“Management is taking a more pragmatic view around operations and investments,” said Wedbush analyst Matt Bryson, who has an underperform rating on Intel, pointing to Intel’s plan to cut costs and separate its foundry operations from its product business to improve efficiency. Intel also lowered its 2022 capex forecast by $2 billion.
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Of the 36 analysts surveyed by FactSet, seven have a buy rating, 21 have a hold rating and eight have a sell rating on Intel. 17 of them lowered their price target, resulting in an average target of $31.39, down from $37.01 previously.