Intel laid out its expectations at a meeting for analysts and investors on Thursday.
Courtesy Intel Corporation
Intel CEO Pat Gelsinger came into his first analyst day since he took the top job with guns blazing, making the case that the dinged up microprocessor giant is the next great growth story, and suggesting that the stock could quadruple from here. It is certainly possible, if Intel hits its long-term guidance for a return to 10%-12% revenue growth with improved gross margins.
But the rewards are still far off, and a lot has to go right. Analysts remain skeptical, seeing both risks in the company’s plan to become a major player in the chip foundry business and continued difficult competition in its core markets.
The stock is selling off Friday.
Intel (ticker: INTC) had a lot to say at the meeting Thursday in San Francisco, but for investors, the biggest news was the company’s financial forecast for this year and beyond. For 2022, the company is projecting revenue of $76 billion, profits of $3.50 a share, gross margin of 52%, and negative free cash flow of $1 billion to $2 billion.
For the next couple of years, the company sees gross margin in the 51% to 53% range, expanding to 54% to 58% in the 2025-2026 period. Intel sees capital intensity—capital spending divided by revenue—in the 35% range in 2023 and 2025 as the company builds out new fabs, falling back to the 25% range over the longer term. The company expects free cash flow to be neutral for a couple of years, but then reach 20% of revenue toward the end of the forecast period.
In short, the bulls will need to be patient.
Intel won’t have the long-term model it laid out in place until at least 2025. Investors will have to endure at least three more years of substantial investment and minimal cash generation, while the companycontinues to wrestle with tough competition from both Advanced Micro Devices (AMD) and Nvidia (NVDA). One wild card is the pending spinout of the Mobileye autonomous driving business—the company said planning for an initial public offering is proceeding well—and a strong reception for the deal could be a boon to the stock.
Meanwhile, analysts noted that the company’s server processor road map as laid out at the meeting showed the launch of the company’s Granite Rapids chip being delayed into 2024 from 2023, adding a little anxiety to the mix. “This product will be key; as recently as 18 months ago the chip was supposed to ship in 2022,” Morgan Stanley analyst Joseph Moore said in a research note, “so to have it slip to 2024 is a bit discouraging regardless of the explanation.”
Moore, who has an Equal Weight rating on Intel shares, left the meeting without any real change in his outlook for the company. He still has worries.
“Though we do appreciate Pat Gelsinger’s, and new CFO Dave Zinsner’s, thoughtful plans to re-energize Intel as a technology leader and strategic national asset, the same aspects we have been concerned about since Gelsinger took over – commitment to the foundry strategy, capital spending, technology road map slippage – remain key elements of the story,” Moore wrote. He said that Intel faces “years of sacrifice and learning ahead” before the push into the foundry business becomes an asset to investors.
Raymond James analyst Chris Caso nicely captured both what happened and the tone of the Street’s reaction.
“The company did a good job in laying out the strategy through 2026, and demonstrated a high level of conviction and enthusiasm against that strategy,” Caso said in a research note. “But the reality of the situation hasn’t changed – Intel’s recovery plan will be long and expensive.”
The bottom line is that if you’re investing in Intel now, “you’re investing for 2025, when they expect to have regained process superiority, and the achievement of a goal that far ahead remains uncertain,” he said. “investors need to be willing to forgo free cash flow for the next three years and be willing to invest through the next likely downturn. We continue to think that remains a big ask for investors.”
Caso kept his Underperform rating on the stock.
Wedbush analyst Matt Bryson, who likewise kept an Underperform rating on the stock, said he thinks the company’s forecast for its core PC business—low-to-mid single digit growth—seems too high, and that the recent surge in PC demand has created tough comparisons. “We see its PC targets as creating a point of risk both to the long-term guide as well as this year’s revenue outlook,” he said.
In late morning on Friday, Intel stock was down 5.6%, to $44.91.
Write to Eric J. Savitz at [email protected]
