The problem with earnings reports is, they only tell you about the past. And what investors care about is the future. If an earnings beat isn’t sustainable—if it doesn’t actually provide new information on the long-term direction of the given business—there will be no investor celebrations.
I provide that mini-lecture because it explains what’s happening today with
stock (ticker: INTC). The chip giant reported simply stellar results for the first quarter after the close yesterday, with revenue and profits way above both guidance and Wall Street estimates. As many had expected, the company saw strong demand in the quarter for processors used in both laptop computers and could-based servers, both segments that appear to be benefiting from the Covid-19-driven shift to working from home.
But Intel also provided a mixed view on the second quarter, in particular offering disappointing guidance on gross margins, and it withdrew the full-year outlook. The company cautioned that the surge in PC-related demand would likely ebb, and that the server business could get tougher in the second half as some industry sectors tighten budgets.
Morgan Stanley analyst Joseph Moore wrote in a research note that while the revenue upside in the quarter was impressive—the company posted revenue of $19.8 billion, up 23% from a year ago, and $800 million above the company’s own guidance—the second-quarter margin outlook at 30%, down from 38% in the first quarter, was “slightly disappointing.” And Moore noted that the strong revenue growth is likely not sustainable, “as the company continues to highlight.”
Moore adds that he sees a “very challenging PC environment” in the second half, as the initial work-from-home surge ends. He thinks cloud spending will be more durable, but that after the recent strength, “some direction seems possible.” He also notes that the company could continue to see market share loss to
Advanced Micro Devices (AMD)
in the cloud-server segment “while the enterprise and government segments where barriers to entry are much higher should be very soft as purchasing is impacted by the declines in employment.”
Moore keeps his Overweight rating on the shares, but adds that “our enthusiasm…is waning.”
Susquehanna Financial Group’s Christopher Rolland today repeated his Neutral rating on the shares. He thinks investors have to be wondering just how bad the company expects the second half to be given the huge first-quarter-revenue beat—and a second-quarter-revenue forecast that likewise was well ahead of Street consensus. “Similar to recent quarters under CEO Bob Swan, it is difficult to discern whether this is management’s true expectation for a sharp slowdown or this is Swan’s (now) signature conservatism,” he wrote.
Rolland also wrote that investors are likely unsettled by the projection for second-quarter gross margin at 56%, down six percentage points from the first quarter. He notes that the drop was blamed on an earlier-than-expected rollout of the company’s new Tiger Lake processors, but that the drop was completely unexpected by the Street.
Northland Capital’s Gus Richard likewise repeats his Market Perform rating on the stock, and remains cautious despite the strong first quarter. “With a more competitive environment and Intel struggling with manufacturing, we do not think margin pressure lets up,” he wrote. “Also pressuring earnings per share is increased debt and suspension of share repurchase.”
Citi’s Christopher Danely isn’t budging from his cautious view on the stock, either. “Despite the strong results, we are maintaining our Neutral rating on Intel given our view of a collapse in data center and PC orders due to a global recession,” he wrote.
Intel stock is down 1%, to $58.40.
Write to Eric J. Savitz at firstname.lastname@example.org