Intel is forecasting a lower gross margin for the third quarter.
Staff Illustration
Margins matter.
Intel (ticker: INTC) stock took a beating Friday from investors who apparently weren’t happy with the chip titan’s forecast for its gross margin, despite strong second-quarter earnings and an overall bullish outlook for the rest of the year.
Shares closed down 5.3%, at $52; the PHLX Semiconductor index, or Sox, ended the day up 0.6%.
Company executives touched on the lower gross margin—53% for the third quarter vs. the second-quarter’s 57.1%—during an earnings call late Thursday. They attributed the drop to a combination of three factors: a new advanced manufacturing strategy, supply constraints, and a new chip called Alder Lake.
Typically, new manufacturing processes and new types of chips mean lower margins in the short run until chip manufacturers figure out how to make production more profitable.
In a note, Baird analyst Tristan Gerra estimated that combination would push Intel’s fourth-quarter gross margins to a 12-year low. Still, Gerra likes Intel’s prospects and reiterated his $85 target price with an Outperform rating.
Jefferies analyst Mark Lipacis rates Intel shares a Hold with a $52 target price, down from $54. He brought up Intel’s margins, too. The new strategy, called IDM 2.0, plus losses in market share to the likes of Advanced Micro Devices (AMD) and Nvidia (NVDA) would thin the company’s gross margin, he wrote.
“We expect the transition to the IDM 2.0 business model will be rocky for Intel..,” Lipacis wrote. “Either way, we think it translates to a lower margin model longer term for Intel.”
Credit Suisse analyst John Pitzer noted that Intel’s second-quarter results indicate investors should balance the near-term realities—a lower gross margin, for example—with the company’s future.
Pitzer pointed to longer-term positive signs such as Intel’s outlook for its data center business in the second half of the year; customer engagement with its new contract manufacturing unit, Intel Foundry Services; and CEO Pat Gelsinger ‘s efforts to attract new talent. He has an Outperform rating on shares and an $80 target price.
Intel didn’t offer investors any details or an announcement about a possible deal between it and contract chip manufacturer GlobalFoundries owner Mubadala Investment, an arm of the Abu Dhabi government. The $30 billion acquisition, if it closes, could give Intel a boost to new IFS business. GlobalFoundries offers an existing customer base, and the sales and marketing infrastructure necessary to support it—both things Intel doesn’t have.
Write to Max A. Cherney at [email protected]
