Intel (INTC), the largest chip manufacturer by revenue, is set to report second quarter fiscal 2021 earnings results after the closing bell Thursday. The market is eager to learn which version of Intel will be on display.
While Intel has surpassed the Street’s revenue estimates in nine straight quarters, investors have grown frustrated about the company’s lack of progress in key business segments, particularly in its datacenter group and client computing group, which accounts for 28.3% and 53.9% of the company’s Q1 revenue, respectively. Weaknesses in these areas for Intel have been magnified by the successes and market share gains from rivals AMD (AMD) and Nvidia (NVDA) in several important chip developments.
Meanwhile, the company’s self-inflicted wounds which has caused once prominent customers such as Apple (AAPL) and Microsoft (MSFT) to start designing their own chips to replace Intel’s offerings. This comes on the heels of Amazon (AMZN) two years ago opting to use its own ARM-based processors. These factors, among others, have pressured Intel shares which have fallen 3% over the past six months, compared to 16% rise in the S&P 500 index. Additionally, the stock is down more than 14% since the company reported its Q1 results.
While new CEO Pat Gelsinger has done a decent job changing the negative narrative surrounding the company, Intel on Thursday must prove the naysayers wrong, while selling the upside potential of the many growth initiatives it can still achieve. The market will also focus on the datacenter business which has reached an inflection point of sorts. Investors will want to see whether that business can finally return to revenue growth, whether on a sequential or year-over-year basis. Until then, the stock will struggle to received multiple expansion relative to its peers.
For the quarter that ended June, the Santa Clara, Calif.-based company is expected to earn $1.06 per share on revenue of $17.84 billion. This compares to the year-ago quarter when earnings were $1.23 per share on revenue of $19.73 billion. For the full year, ending in December, earnings are expected to decline 11.3% year over year to $4.62 per share, while full-year revenue of $72.94 billion would decline about 6.3% year over year.
The expected year-over-year declines in revenue and profits are a couple of reasons Intel wants to reinvent itself. Aside from announcing several new initiatives, including IDM 2.0, Intel doubled down on its willingness to boost manufacturing capacity. Intel’s ability to execute, however, has been a major issue over the past several quarters. To be sure, past failures in execution has not been under Gelsinger's watch. In the first quarter, revenue was essentially flat, while adjusted EPS of $1.39 declined year over year.
Despite the decline in Q1 earnings per share, the number was significantly higher than analyst estimates and the company’s own forecast. Q1 revenue of $18.57 billion also topped the $17.9 billion expected, albeit flat year over year. Gelsinger, who took over in February, called this is a “pivotal year for Intel,” announcing plans not only to invest $20 billion in new microchip manufacturing plants, but also how Intel would become a contract chip manufacturer, making other company’s chips in addition to its own. Progress on this front will be another key area the market will focus on.
All told, given the degree of pessimism still priced in the stock, Intel offers compelling long-term value, especially when factoring in the company’s 2.53% annual dividend yield.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.