Intel (INTC) Stock Plummets as Expensive Investments Expected to Pressure Margins and FCF, Prompting Three Downgrades to Neutral

October 22, 2021 6:21 AM EDT
Get Alerts INTC Hot Sheet
Price: $48.92 -1.69%

Rating Summary:
    24 Buy, 24 Hold, 13 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 0 | Down: 2 | New: 5
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Intel (NASDAQ: INTC) stock is down 10% in pre-open Friday on mixed Q3 results and disappointing guidance and commentary.

Intel delivered EPS of $1.71 to easily top the Street consensus of $1.11, while revenue came in at $18.1 billion to miss on the $18.24 billion consensus. CEO Pat Gelsinger blamed disappointing sales and demand on “the overall supply challenges of the semiconductor industry.”

Intel stock was further hit after the company warned its gross margin and free cash flow will decline over the next 2-3 years as a significant portion of generated revenues will be channeled towards new chip factories and R&D. Intel also announced that CFO George Davis announced plans to retire in May 2022.

For this quarter, Intel sees EPS of $0.90 on sales of $18.3 billion, which compares to the analyst estimates of $1.01 EPS on revenue of $18.25 billion.

Morgan Stanley analyst Joseph Moore downgraded Intel stock to Equal Weight from Overweight and lowered the price target to $55.00 per share from the prior $67.00 on signaled capital spending increase.

“The situation is mixed, but ultimately the capital spending requires underwriting a growth forecast that seems challenging; the product pipeline is looking better after years of struggles, the quarter was ok (albeit with significant market share related weakness in cloud, and some supply related weakness in 4q, as expected), and while gross margin guidance for next year was worse than our expectations, we think it was in line with investor expectations - and will be largely offset by an accounting change where the company starts to proforma out $500 per quarter of stock based compensation, to keep non-GAAP numbers relatively intact,” the analyst said in a client note.

For Moore, the downgrade to EW was a “frustrating” call to make as the company is on the “brink of a product turnaround.”

“But we have consistently said that over $25 bn in capital spending would be problematic for us, and guidance for $25-28 bn "and higher in future years" puts the burden on double digit growth in 2023 and beyond - which the company also forecast - that seems challenging, particularly given our more cautious view on hardware demand overall,” Moore added.

Similarly, Mizuho’s Vijay Rakesh downgraded to Neutral from Buy and also introduced a new price target of $55.00 per share (from $70.00) on higher investments.

“We have been positive on INTC's ability to return to executing on its technology roadmap with new management. However, we now believe INTC's capital-intensive Foundry shift adds uncertainty to its likelihood of catching up to leading-edge by executing on its core PC/Server roadmap, and believe the GM reset to 51-53% (current 56%) over 2-3 years could be difficult to recover. INTC also set a 10-12% top-line CAGR target we believe could be hard to achieve given its recent historical CAGR of ~3%,” Rakesh wrote in a note sent to clients.

UBS analyst Timothy Arcuri also downgraded Intel from Buy to Neutral with a price target of $58.00 (from $73.00).

Intel stock closed at $56.00 yesterday and it is indicated to open at $50.52 today.

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