Shares of Intel (INTC) continued their post-earnings slide today, dropping about 2.52% to $51.11. On April 24, the day before there company reported first quarter 2019 earnings, the stock closed at $58.72. That’s a drop of 12.96% in less than a week.
I think three things are behind that drop. One is related to a growth problem at Intel. Another is the extraordinary recent outperformance by chip stocks. And a third is related to a shift in where the growth is for semiconductor companies. In other words, one is Intel specific. One is a reflection trends in the recent rally in general. And the third is tied to developing trends in technology.
Let’s start with the Intel-specific stuff.
For the quarter Intel reported 89 cents a share, 2 cents a share better than Wall Street had projected. Revenue of $16.0 billion was below analyst expectations for $16.1 billion. For investors who don’t play the earnings expectations came–you know, set expectations low and then beat them–the telling revenue figure was the 0% growth in revenue from the first quarter of 2018.
And then, Intel lowered it guidance for the second quarter to earnings of 89 cents a share vs analyst projections for $1.02 a share and to revenue of $15.6 billion vs elections for $16.88 billion in revenue. For the full 2019 year Intel lowered guidance to earnings of $4.35 a share (vs expectations for $4.50 a share) and revenue of $69.0 billion (vs $71.07 billion.)
This lowered guidance might not have mattered so much except that the semiconductor sector in general and Intel in particular had been on a tear in 2019. Before earnings Intel shares were up 22.8% for 2019and the PHLX Semiconductor Index was ahead 35.1% for 2019. The rally included expectations of a rebound in semiconductor revenue as the “inventory” problems of the last couple of quarters turned out to be transitory one or two quarter blips. But Intel’s guidance said that any rebound in revenue was further off than that–in the second half of the year at earliest. Those words from Intel came after cautious guidance from Taiwan Semiconductor Manufacturing (TSM) the previous week–the company said it didn’t see a sharp rebound until the second half–and Texas Instruments (TXN)–the company noted that semiconductor down cycles typically lasted four to five quarters and this one was just two quarters old.
And finally, Intel’s lack of revenue growth and its lowered guidance for the rest of 2019 drew attention to Intel’s struggles with a shift in trends in the chip sector. Importantly, the lack of growth in the first quarter–and the lowered guidance for the second quarter-weren’t a result of struggles in the company’s PC chip unit. The client computing group, the locus of growth problems for the last few years, actually showed 4% revenue growth year over year. the data center group, the big growth driver at Intel recently, however, showed a 6% drop year over year drop in revenue. Now given comments from competitors in this segment such as Nvidia (NVDA) the revenue growth troubles in the data center segment weren’t exactly a surprise. Demand in China has dropped and the market is working through an inventory build up. But the drop in revenue for the data center unit drew attention to the general growth problem at Intel. Just at a time when the company’s withdrawal from the 5G modem chip market after Apple (AAPL) and Qualcomm (QCOM) settled their suit, reminded investors that Intel had missed out on that market. The data center market had been Intel’s big growth story and if that was now faltering what was left to drive revenue higher, faster at the company?
Intel has made it clear that it doesn’t intend to miss out on new chip markets in automobile and the Internet of Things. In 2017 Intel bought Mobileye for $15.3 billion to accelerate its move in the auto market for chips. And Intel has been pushing steadily into market for chips to go into devices that will connect to the Internet such as home security systems, intelligent appliances, and the like. But these are still tiny businesses in the scheme of things with Mobileye contributing just $910 million to first quarter revenue (with year over year growth of 38%) and the Internet of Things group showing revenue of just $209 million (and growth of just 8%.)
I think there’s a worry, especially after the company’s withdrawal from the 5G modem chip market, that Intel may not have the technology chops or the market positioning to become a Big Dog in either of those new sectors. And if that’s the case, why would you want to own Intel until the data center market is growing again?