Intel (INTC) Shares Pounded on 'Low Quality Earnings', Forcing Analysts to Downgrade Shares and Slash Targets

October 23, 2020 7:17 AM

Intel (NASDAQ: INTC) shares are down nearly 10% in pre-open trading Friday following earnings, which some analysts called "low quality" and led at least one analyst to downgrade shares to its lowest rating, citing "rising challenges on multiple fronts". A host of other analysts across Wall Street lowered their price targets and slashed estimates.

Intel reported third-quarter revenue of $18.3 billion, above $18.2 billion market consensus, but down 4% year-over-year (YoY). The data-centric revenue fell as much as 10% while non-GAAP EPS came in at $1.11, in line with market expectations. Intel’s free cash flow stood at $15.1 billion at the end of the quarter while the tech giant paid $4.2 billion in dividends.

Intel also confirmed that NAND sales to Sk Hynix for $9 billion will go ahead next year.

“Our teams delivered solid third-quarter results that exceeded our expectations despite pandemic-related impacts in significant portions of the business,” said Bob Swan, Intel CEO.

“Nine months into 2020, we’re forecasting growth and another record year, even as we manage through massive demand shifts and economic uncertainty. We remain confident in our strategy and the long-term value we’ll create as we deliver leadership products and aim to win share in a diversified market fueled by data and the rise of AI, 5G networks and edge computing.”

The company is also raising full-year revenue and earnings expectations, now expecting 5% top-line growth YoY in 2020 with full-year revenue of $75.3 billion. The new model assumes GAAP EPS of $4.55 and non-GAAP EPS of $4.90.

BofA Securities analyst Vivek Arya downgraded Intel to "Underperform" from "Neutral" as the latest earnings report showed a weakness in the data-center sales.

Although the analyst praises the company’s incumbency, portfolio breadth, balance sheet/FCF as well as strategic US-based manufacturing, Arya notes three structural issues with INTC:

1) No plan/update to fix manufacturing challenges at next-gen 7nm, with continued low yields at current-gen 10nm process;

2) Mix pressure as demand moves to more competitive cloud/consumer markets away from

INTC’s profitable enterprise PC/server markets (data center missed Q3 by 4%, down 8% YoY, plus 10nm Ice Lake server pushed out to Q1);

3) increasing competition from faster, nimbler fabless competitors such as NVDA, AMD, ARM-based suppliers and others that are able to take advantage of the foundry ecosystem.

As a result, BofA’s analyst cut EPS estimates

“The uncertainty of roadmap execution could continue to erode INTC’s 80-85% value share in PC/data center markets and constrain EPS growth. We lower our CY21/22 EPS estimates by 1-2% to $4.65/$4.70 and lower our PO to $45 from $60 based on 12x CY21E EV/FCF from 14x prior, with new PO implying ~10x CY21 PE, lower-end of INTC’s 9x-16x historical range, reflecting the continued uncertainty.”

Arya slashed the price target on INTC to $45.00 per share from the prior $60.00.

In a more moderate fashion, Mizuho’s Vijay Rakesh cut the price target on INTC from to $60.00 from $63.00 while reiterating a “Buy” rating.

Rakesh believes that pricing and weaker enterprise and cloud digestion could yield a negative impact on the outlook.

“SepQ DCG revs fell 7% y/y on data center cloud digestion with lower enterprise mix, but also potentially aggressive pricing as 3Q20 DC ASPs fell 15% y/y. But INTC noted Enterprise and Government spending was down a severe 47% y/y with COVID timing impacts (in contrast, AMD has minimal Enterprise exposure). SepQ CCG rev rose 1% y/y, with PC volumes up 11% y/y BUT ASPs for NB/DT down 7%/flat y/y, respectively with mix shift to lower-end and consumer PCs,” he wrote in today’s note to clients.

Rakesh updated Mizuho’s INTC model for the 4Q from $17.3B/$1.05 to $17.4B/$1.10 and F21E from $75.1B/$4.87 to $68.7B/$4.88.

Northland Capital Markets analyst Gus Richard lowered the price target on Intel to $46.00 (from $48.00) while maintaining an Underperform rating. He said the quality of earnings was poor and noted upside in interest income, lower taxes, share count and lower opex offsetting weak gross margin. He also said the quarter had a weak product mix.

Intel also saw its price target cut at Credit Suisse, Citi, Morgan Stanley, Susquehanna, Rosenblatt, Deutsche Bank, RBC Capital, as well as a host of others.


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