Wall Street is worried that Intel's disappointing earnings are a sign that its terrible year will only get worse: '2021 seems like a messy year'
- Intel shares tumbled on Friday after the chip giant posted a drop in revenue for its data center processor business.
- Some analysts warn that Intel, the biggest semiconductor maker in the world, faces rougher waters in the coming year, amid stiffer challenges from rivals AMD and Nvidia.
"Fundamentals are now deteriorating at an alarming pace," Bernstein analyst Stacy Rasgon told clients in a note. "We have to believe that 2021 is going to be worse."
- Other analysts offered a more upbeat view: "Intel still has a tremendous amount of intellectual property that can be deployed to make money well into the future," analyst Roger Kay told Business Insider, calling it "a solid company underneath."
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Intel is having a really terrible year, and some analysts predict the next will even be worse.
The chip giant's shares plunged more than 11% on Friday after reporting a big drop in revenue in its data center group, raising a red flag on a critical business for the tech giant.
Intel's results were generally in line with Wall Street estimates, but the sales drop in its data center business, which grew 43% the previous quarter, was stunning. Intel shares also plummeted in July when it reported that production problems would delay its next generation chips.
"While we thought last quarter's call was bad, last night's was potentially even worse as fundamentals are now deteriorating at an alarming pace," Bernstein analyst Stacy Rasgon told clients in a note.
In a call with analysts, Intel CEO Bob Swan pointed to the many hurdles the company faced this year, saying, "2020 has been the most challenging year in my career — with a global pandemic, geopolitical tensions challenging business principles of globalization and social unrest."
"Despite all this, we expect to deliver the best year in our storied 52-year history," he said, adding that Intel intends to "grow revenue by $1.8 billion more than our January expectations."
But some analysts said they are bracing for more bad news.
"Frankly, while CEO Bob Swan suggested 2020 has been the most challenging year in his career, we have to believe that 2021 is going to be worse," Rasgon wrote.
Morgan Stanley's Joseph Moore echoed that view, telling clients, "2021 seems like a mess year."
There are still reasons to be long-term bullish on Intel, but the short-term challenges are severe
Still, even the bears aren't giving up on Intel's long-term prospects: Moore did note that "Longer term, we think the company is working to build a more solid foundation."
Roger Kay of Endpoint Technologies Associates also argued that Intel's "fundamental business looks pretty solid," as the company navigates the pandemic.
"It has lost server share to AMD, but the reporting period was during Covid, and I think the market should cut the company at least a small amount of slack," he told Business Insider.
That upbeat view is based on Intel's still dominant position as the biggest chip manufacturer in the world with a long history of innovation. This remains true in the market chips used to power data centers, which have become increasingly lucrative with the rise of cloud computing.
Intel's share of the $6.1 billion server chip market in the second quarter was 91%, down 2% from the year-ago quarter, according to IDC. Rival AMD's share was 6%, up 2%.
But Intel is grappling with other challenges, led by production missteps that have shaken investor confidence in the corporate behemoth.
The production delay Intel announced last quarter was caused by problems it encountered in transitioning to the more advanced 7-nanometer process, referring to the manufacturing technology based on the line-width on chips. Intel historically led the way in producing smaller and less expensive processors, but has recently struggled with its manufacturing process.
The company also has been offloading some of its businesses. It recently announced a plan to sell its flash memory chip business to SK Hynix for $9 billion.
Competitors are circling
With all of those challenges ahead, competitors — including, but not limited, to AMD — have taken steps to shore up their own strategies as they move to take advantage of any perceived weaknesses at Intel.
"The chips business is definitely getting more competitive, and Intel's smaller rivals are bulking up," Kay said.
The most prominent example is Nvidia, the graphics chip giant which has outmaneuvered Intel in the market for chips geared to AI systems. Nvidia has announced a plan to buy chip design powerhouse Arm for $40 billion, which would enable the chipmaker to expand its reach in the semiconductor market.
AMD is also reportedly interested in buying Xilinx, which makes programmable chips, for $30 billion, a move that would strengthen its position in the data center market.
Altogether, it looks like Intel is facing tough times ahead, with its product leadership called into question amid the continued rise of its rivals.
"Intel is a damaged company," analyst Marty Wolf, president of Martinwolf M&A Advisors, told Business Insider. "They need new tech leadership."
Kay offered a less grim view, saying, "Intel still has a tremendous amount of intellectual property that can be deployed to make money well into the future. Tough quarter, and severe punishment by the Street in after hours, but essentially a solid company underneath."
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