Investors in Intel (NASDAQ: INTC) breathed a sigh of relief on July 27 as the semiconductor giant reported a surprise profit and comfortably outperformed Wall Street’s revenue expectations.
Furthermore, Chipzilla’s guidance for the current quarter was stronger than predicted. The company anticipates revenue of $13.4 billion in the third quarter, which is higher than the $13.2 billion average estimate. It also expects to earn $0.20 per share, compared to analysts’ expectations of $0.16 per share.
Investors were pleased with Intel’s performance, as the stock rose about 6% following the announcement. However, a closer examination reveals that the cause for Intel stock’s increase following its report may not be sufficient to sustain its advance in the long run.
The PC market may not recover, but Intel’s fortunes are turning around.
Intel continues to struggle as the personal computer (PC) market continues to deteriorate, resulting in six straight quarters of sales decline and seven quarters of year-over-year profitability decline. Even the company’s forecast for the upcoming quarter indicates a considerable decline in revenue and earnings. In the third quarter of 2022, Intel earned $0.59 per share on revenue of $15.3 billion.
However, there were enough positive takeaways from Intel’s recent quarterly report for investors. Analysts expected a 21% year-over-year fall in Intel client processor sales last quarter, while the company reported a 12% decline. It’s also worth noting that the reduction was much smaller than the previous year’s first-quarter drop of 38%.
The reduced decreases signal that the PC industry is reviving after taking a beating in 2022. According to Gartner, PC shipments will fall 16% in 2022. The PC market had a disastrous start in 2023, with shipments down 30% year on year in Q1, although this calmed dramatically in the second quarter, with shipments falling 16.6%. This resurgence aided Intel’s performance last quarter, but investors should keep in mind that the PC market is far from over.
According to IDC, the global PC market would decrease 14% by 2023. Only in 2024, when global PC and tablet shipments are forecast to climb 4.7%, is a recovery expected. Furthermore, PC sales are expected to climb at a compound annual growth rate (CAGR) of 3.6% from 2023 to 2027, reaching 289 million units at the end of the projected period, up from 251 million shipments this year.
Analysts aren’t expecting much of an uptick in Intel’s growth over the next five years, though, with a CAGR of 6% predicted. Intel needs to generate much greater growth for a stock that has risen 35% in 2023 and prices at a premium 116 times forward earnings. That is why management appears to be focused on the opportunity afforded by the increasing usage of artificial intelligence (AI), which has the potential to considerably improve Intel’s chip sales in the long run.
AI might provide a significant boost to Intel.
AI was a major topic of conversation during Intel’s most recent earnings conference call. That’s clear from the fact that the term “AI” was referenced 61 times throughout the call, which is unsurprising given management’s view of a massive income opportunity in this sector.
More precisely, Intel views AI as one of the primary growth factors that will propel the global semiconductor industry to $1 trillion in annual revenue by 2030. With the AI chip industry predicted to develop at a 30% annual pace through 2032 and create $227 billion in annual revenue at the conclusion of the forecast period, the proliferation of AI will be critical for Intel and other chipmakers.
The good news is that Intel’s AI chips have begun to gain traction with customers. Intel claims to have a revenue pipeline of more than $1 billion for its AI accelerators through 2024, including the Gaudi deep learning processor. Of course, this is a minor sum when compared to Intel’s $56 billion in revenue in the previous year, but Intel sees its AI accelerators gaining traction.
Furthermore, Intel claims that a quarter of its most recent fourth-generation server CPUs are being used for AI tasks. In addition, the business plans to include a specialized AI engine in its future Meteor Lake server processors.
These measures may assist Intel in making inroads into the market for general computing AI chips, which the company predicts will account for 60% of the overall AI chip market in the long term. The remaining 40% of the AI chip industry will be made up of accelerated processing processors, such as graphics cards for training huge models, which Nvidia presently controls.
However, investors should keep a watch on Intel’s success in AI processors because this technology will play a critical part in the company’s resuscitation, thus Intel must continue to build a big pipeline of AI-related income if it is to prolong its stock market boom.