Intel: Dreadful Start To 2023 (NASDAQ:INTC)

Last October I believed that big cost cutting efforts at Intel (NASDAQ:INTC) posed both a solution and a risk to its woes. The company was trying to save operational expenses to fund large upcoming net capital expenditure requirements, which were badly needed to revamp its competitive position while continuing to fund the generous dividend as well.

Shares traded at $28 and change, having bounced from a low of $25, with investors being aware that the situation was very challenged. This came despite the successful IPO of Mobileye Global (MBLY), in which Intel continued to hold a large majority stake of course, potentially a milking cow to fund the negative cash flows.

A Recap

Intel’s troubles started well ahead of the pullback in first technology valuations in 2022, followed by actual softness in the results later that year throughout the sector. Intel has been struggling for years already with regard to its competitive positioning, as the current downturn only comes on top of that.

The bombshell report arrived in the summer of 2020, when Intel announced a six-month delay in the product development roadmap for its 7nm product, allowing Advanced Micro Devices (AMD) to take away (even more) market share.

To take on the huge challenges, at the time still from a position of relative (financial) strength, the company hired veteran Pat Gelsinger to lead the business early in 2021, with Mr. Gelsinger now in the lead for nearly two years.

2020 sales were still very strong as the company posted $77.9 billion in sales on which it posted earnings of $5.30 per share, as strong earnings, strong economic growth and a benefit from re-shoring of chip production under the CHIPS act, acted as counterweights against the soft development progress. The company already announced its intention to float Mobileye, selling the NAND and SSD business to SK Hynix in a $7 billion deal.

2021 sales rose by a percent to $79.0 billion, with adjusted earnings down to $4.86 per share, still translating into a huge earnings number equal to $19.9 billion, as net debt stood at just $3 billion. By then it was clear that 2022 was setting up to be a tougher year, evident through a 7% fall in first quarter sales to $18.4 billion and a 22% decline in second quarter sales to $15.3 billion, with earnings falling in a more pronounced manner.

With full year sales seen at just $65-$68 billion and earnings seen at just $2.30 per share, the company resorted to cutting the capital expenditure budget by four billion to $23 billion. The company guided for flattish sales in the third quarter. I had feared it could be even worse. As it turned out, third quarter sales came in flattish (compared to the second quarter) at $15.3 billion, as net debt had risen to $17 billion amidst continued net capital investments and dividend payouts. The net debt load is ahead of a $6 billion equity investment position, excluding a roughly $20 billion valuation held in Mobileye, with Intel still holding 94% of the shares following its IPO.

Addressing the earnings shortfall, the company aimed to cut costs by $3 billion in 2023 and by another $8-$10 billion through 2025, as the company saw fourth quarter sales at just $14-$15 billion, with minimal earnings seen at $0.20 per share. Earnings are desperately needed as net capital investments trend around $10 billion. The dividend sets the company back another $6 billion per annum, while current earnings power is far too small to maintain net debt levels here.

While a dividend cut could not be ruled out, that was not my primary concern. The real concern and challenge is to regain competitiveness, and with capital spending cuts and operating cost savings pursued, those actions provide few reasons to be upbeat on that.

Struggling Along

Since last looking at Intel this autumn, shares have been trading in a $25-$30 range, as they traded around the $30 mark in recent days with the fourth quarter earnings report triggering shares to fall to the $28 mark, as the results were not too pretty.

The company posted fourth quarter sales at just $14.0 billion, coming in at the lower end of the range, with adjusted earnings of $0.10 per share only coming in at half the guidance provided, with GAAP losses reported at $0.16 per share. Sales declines were driven by more than a 30% revenue decline in the core client computing group and similar declines at the data center and AI business.

Even more so, the first quarter earnings report was shockingly soft, with first quarter sales seen at a midpoint of $11 billion, plus or minus half a billion. Adjusted losses are seen at $0.15 per share, but cash outflows are likely significant amidst these losses, net capital expenditure requirements and dividend payouts. Anticipated losses and lower current profitability is not just a function of sales deleveraging, but also price cuts and investments needed to revamp the competitiveness of the business.

Still holding $28.3 billion in cash, equivalents and short term investments, gross debt has risen to $42 billion. This means that net debt has risen quickly to nearly $14 billion, even though still “backed” by the nearly $6 billion in equity investments as well as the Mobileye stake. On the positive side, shares of Mobileye still trade at $35, far ahead of the IPO price, with Intel´s stake valued around $28 billion here, creating quite some room to create some cash flows here.

Concluding Remark

The truth is that I am less constructive here at $28 than I was at $28 in November. The fourth quarter results were a bit soft, but that was not the real concern, as the first quarter sales guidance is utterly underwhelming. Given this very soft outlook, which implies a more rapid deterioration in the financial position, the situation is a bit concerning, certainly as even adjusted probability metrics are now expected to show losses, with dividends and capital spending resulting in additional cash outflows.

Hence, I see no reason to alter a modest long position here, either through adding or selling the shares.