Chip Somodevilla
Intel Corporation (NASDAQ:INTC) is slated to release its FQ4 and FY22 earnings release on January 26, which semi investors will closely watch.
The company went on a charm offensive last week as it launched its Sapphire Rapids data center processor successfully after notable delays. Formally named “4th Gen Intel Xeon Scalable processors,” the company is confident that it could help “reignite its path to data center leadership” against arch-rival AMD’s (AMD) EPYC processors.
Despite that, analysts still expect AMD to continue gaining share, with Arm-based processors also impinging on Intel’s dominance. However, CEO Pat Gelsinger & his team have a solid opportunity to turn around its execution, given Intel’s new offspring from its Xeon series.
Intel highlighted that Sapphire Rapids has “the most accelerators built into a data center processor in the industry.” Hence, the company believes it has a solid roadmap toward more complex AI-driven high-performance computing (HPC) workloads.
Gelsinger also reminded investors of Xeon’s leadership, with an installed base of 100M Xeon processors supporting the company’s scale. Lenovo also expressed its optimism with Intel’s execution, articulating: “What we want is a stable cadence that is predictable. Sapphire Rapids is the start of a journey.”
Micron (MU) also supports Intel’s Sapphire Rapid with its DDR5 server memory, which is “fully validated” as Intel integrates high memory bandwidth. Still, it is too early to tell whether it could help Intel turn around its projected share loss against AMD. However, we believe it demonstrates that Intel can be relied on as the market leader to execute and protect its market leadership.
Interestingly, the company also discussed its long-term outlook on the PC TAM a few days after the launch of Sapphire Rapids. Intel argued that secular tailwinds in education, consumer, and enterprise/commercial segments remain robust. Coupled with the sustenance of hybrid work, it should help underpin a 300M units long-term outlook. Notwithstanding, it sees 2023’s forecast between 270M to 295M units, with downstream partners’ visibility closer to the lower end of its forecast range.
Investors need to understand that the company’s TAM outlook is not equivalent to the sell-in shipment forecasts, still impacted by downstream inventory adjustments. Hence, desktop and notebook shipments are expected to remain tepid in 2023. Moreover, Apple (AAPL) is also projected to “slash its MacBook orders by 40%,” impacting the entire value chain. BofA (BAC) is less optimistic about Intel’s projections, suggesting a TAM of “250M and 255M units before the situation recovers to the 260M level of prior years.”
Despite that, management reminded investors of the accuracy of its TAM prediction, as Chief Commercial Officer accentuated:
Our team at Intel has a strong history of accurately forecasting Intel’s PC tech. In fact, over the past 7 years, our forecast has had accuracy within plus/minus 5% with 2 exceptions. 2020 was a COVID year. And 2022, as we all know, was an unprecedented year as no one predicted the war in Ukraine, the significant inflationary pressures, the continued COVID driving weakness, particularly in China, and all of that resulting in a deteriorating macroeconomic environment, leading to the risk of a global recession. (Intel Investor Webinar)
INTC has outperformed the S&P 500 (SPX) (SPY) from its December lows, up nearly 20%. Therefore, we assessed that the market has likely reflected a better-than-expected earnings release, as Wall Street (consensus rating: Neutral) remains lukewarm over Intel’s execution.
With an NTM EBITDA of 7.7x, it remains well below its peers’ median of 9.6x and markedly below AMD’s 14.9x. Hence, INTC bulls could argue that it is still cheap even with the 20% uptick from its recent lows.
Despite that, INTC has surged recently as it closes in against its November highs. We think investors should consider waiting for another pullback before adding more exposure.
Rating: Hold (Revise from Buy).
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