Intel (INTC +1.24%) investors heaved a sigh of relief after the company released its second-quarter 2023 results on July 27 as the semiconductor giant posted a surprise profit and exceeded Wall Street's revenue expectations comfortably.
What's more, Chipzilla's guidance for the current quarter turned out to be better than expected. The company expects revenue of $13.4 billion in the third quarter, ahead of the $13.2 billion consensus estimate. It also expects to post a profit of $0.20 per share as compared to analysts' expectation of a $0.16 per share profit.
Intel's performance was appreciated by investors as the stock jumped nearly 6% following the results. But a closer look suggests that the reason why Intel stock surged after its report may not be enough to support its rally in the long run.
NASDAQ: INTC
Key Data Points
The PC market may not turn Intel's fortunes around
Intel continues to struggle amid weakness in the personal computer (PC) market, which has led to six consecutive quarters of revenue decline and seven quarters of year-over-year earnings decline. Even the company's outlook for the current quarter points toward a significant contraction in revenue and earnings. Intel earned $0.59 per share in earnings on revenue of $15.3 billion in the third quarter of 2022.
However, there were enough positive takeaways for investors from Intel's latest quarterly report. Analysts were anticipating a 21% year-over-year decline in sales of Intel's client processors last quarter, but it reported a smaller 12% decline. It's also worth noting that the drop was significantly smaller than the first-quarter drop of 38% over the prior-year period.
The smaller declines suggest that the PC market is in revival mode after a brutal hammering in 2022. According to research firm Gartner, PC shipments fell 16% in 2022. The PC market witnessed a horrible start in 2023 as shipments fell 30% year over year in Q1, but that eased significantly in the second quarter with a fall of 16.6%. This rebound helped Intel's performance last quarter, but investors shouldn't forget that the PC market isn't out of the woods yet.
Market research firm IDC expects the global PC market to contract 14% in 2023. A recovery is expected only in 2024, when global PC and tablet shipments are anticipated to increase 4.7%. Moreover, sales of PCs are estimated to increase at a compound annual growth rate (CAGR) of 3.6% from 2023 to 2027, jumping to 289 million units at the end of the forecast period from this year's estimate of 251 million shipments.
So, while Intel investors did find a reason to cheer following its results as they point toward a potential recovery in PCs, it may be too early to celebrate as the market may take some time to recover. Also, the long-term prospects of the PC market don't seem to be solid enough to drive a turnaround at Intel. After all, the company's earnings have declined at an annual pace of 18% over the past five years.
Analysts aren't expecting much of an acceleration in Intel's growth over the next five years either, forecasting a CAGR of 6%. For a stock that has surged 35% in 2023 and trades at an expensive 116 times forward earnings, Intel needs to deliver far better growth. That's why management seems to be focusing on the opportunity presented by the growing adoption of artificial intelligence (AI), as the technology has the potential to significantly boost Intel's chip sales in the long run.
AI could give Intel a big boost
AI was a key point of discussion on Intel's latest earnings conference call. That's evident from the fact that the term "AI" was mentioned 61 times on the call, which is not surprising as management sees a huge revenue opportunity in this area.
More specifically, Intel sees AI as one of the key growth drivers that will push the global semiconductor industry toward annual revenue of $1 trillion by 2030. With the AI chip market expected to clock annual growth of 30% through 2032 and expected to generate $227 billion in annual revenue at the end of the forecast period, it is easy to see that the proliferation of AI is going to be of vital importance for Intel and other chipmakers.
The good part is that Intel's AI chips have started gaining traction among customers. Intel says that it has already been sitting on a revenue pipeline of more than $1 billion for its AI accelerators through 2024, especially its Gaudi deep learning processor. Of course, that's a small figure when we consider that Intel has generated $56 billion in revenue in the trailing 12 months, but Intel sees its AI accelerators gaining further momentum.
Moreover, Intel says that a quarter of its latest fourth-generation server processors are being deployed for AI workloads. Additionally, the company intends to add a dedicated AI engine to its upcoming server processors code-named Meteor Lake.
These moves could help Intel cut its teeth in the market for general computing AI chips, which the company believes would account for 60% of the overall AI chip market in the long run. The remaining 40% of the AI chip market will comprise accelerated computing chips, such as graphics cards for training large models, a space that Nvidia currently dominates.
Meanwhile, the general computing chips will be used to run small to medium-sized AI models using server CPUs (central processing units). Given that Intel controlled 82% of the server processor market in Q1 2023, according to Mercury Research, it can benefit from the growing need for general computing AI chips. In all, the combination of a PC recovery and the opportunity in AI chips could help Intel recover, and this is exactly what analysts are expecting from it.
However, investors should keep an eye on the company's progress in AI chips as this technology is going to play a central role in the company's revival, so it is important for Intel to continue building a large pipeline of AI-related revenue if it is to sustain its stock market rally.
