Intel Corp (NASDAQ: INTC) has been the subject of much speculation in recent times, with analyst Vivek Arya reiterating a Neutral rating and a price target of $50. Yet, what does this outlook truly herald for the chip giant?
According to Arya, the fourth quarter might just shape up to meet, and in some respects, surpass expectations. He envisions $15.1 billion in sales, a 46.5% gross margin, and approximately $0.45 EPS. However, for the first quarter, he has set a more pessimistic tone, forecasting $13.5 billion in sales, an 11% sequential decline, driven by a multitude of headwinds including a faltering Mobileye outlook, PC seasonality, weakened industrial/auto sectors, networking issues, and waning enterprise demand.
However, Arya did hint at a potential silver lining – the upward surprise in the gross margin trajectory. He cited Intel’s ongoing cost restructuring efforts as a potential driver for higher EPS, raising hopes among some investors. Despite this, Arya opted to lower the sales forecast for 2024 to $58.5 billion, representing an 8.5% year-on-year increase, marginally below the previously projected 9.7% ascent and the consensus of $61.3 billion in sales. Additionally, he modestly adjusted the calendar 2024 EPS estimate to $1.48, still falling short of the $1.82 consensus.
Arya underscored the uphill climb facing Intel as it strives to regain its historical 60% gross margin target, a feat that hinges on a myriad of intricate factors. He highlighted the stark differences between the present and Intel’s glory days of 2014-2017, emphasizing the monumental challenges stemming from a more fragmented CPU market, higher capex intensity, and more onerous depreciation burdens.
The road to recovery, Arya suggests, may see Intel exit fiscal fourth quarter of 2023 at around 46%-47%, with incremental margins in the range of 60%-70% over the next two years as the company embarks on its ambitious five nodes in 4 years (5N4Y) roadmap. Despite these aspirations, Arya remained cautious, projecting gross margins for 2024, 2025, and 2026 at 45.5%, 46.8%, and 48.4% – trailing consensus estimates by about 200 basis points.
Shifting the attention to the market sentiment surrounding Intel, Arya pointed out that the company’s 25x NTM PE ratio currently towers nearly 2x above its historical 13x multiple, signaling a strong investor conviction in Intel’s potential to catch up to industry leader Taiwan Semiconductor Manufacturing Company Ltd (NYSE: TSM) in manufacturing prowess.
Despite Intel’s potential progress with its 18A process and the prospects of securing notable foundry customers like Nvidia Corp (NASDAQ: NVDA), Arya cautioned that TSMC’s dominance is unlikely to be trounced, especially when appraised in terms of scale, manufacturing yields, and reliability. Moreover, Intel’s ability to secure more than a slight foundry share was cast into doubt, as its fabless clients seemed irrevocably tethered to TSMC and Samsung for their production needs.
In a separate consideration, Arya flagged the lingering threat posed by Arm Holdings Plc (NASDAQ: ARM), seen as a potential disruptor capable of encroaching further into the data center and PC markets over time. Such concerns have added to the overall air of uncertainty surrounding Intel’s future prospects.
At the end of the day, the industry behemoth is far from a lost cause, with INTC shares trading higher by 0.38% at $49.08 on Wednesday’s closing bell. The future trajectory of Intel’s fortunes remains shrouded in ambiguity, but one thing is certain – the chipmaker is at a crossroads, and it will take more than mere wishful thinking for it to reclaim its former glory.
Photo via Wikimedia Commons
