Intel (NASDAQ: INTC) has historically been one of the world’s leading semiconductor companies. That position has changed, especially after considering its Q2 2024 earnings, released on Aug 1, 2024. Shares plummeted the day after the release, declining over 25%. The firm has now lost over half of its value since 2024 began. First, we'll check out the firm's annual filing to see how it's operating, then break down the release. We'll look at some strategic mistakes Intel has made and examine potential ways to fix them. Lastly, we'll take a look at the latest Wall Street analysts' price targets.
Intel’s Segments: It’s All About the CPUs
Intel’s business operates as three reportable segments: the Client Computing Group (CCG), Data Center and AI (DCAI), and Network & Edge (NEX).
CCG primarily revolves around the development and sale of personal computer central processing units (CPUs). These are the “brains” of computers that perform calculations and run applications. It accounted for 54% of revenue in 2023 but was the firm’s only profitable segment in the year. It had an operating margin of 22%.
DCAI also manufactures processors but sells them to large enterprises for running their cloud software in large data centers. It accounted for 29% of revenue.
NEX designs processors for edge computing, which process data close to the source where it is generated rather than sending it back to a data center. This is essential for industries like autonomous driving, which need computers to make decisions quickly and succeed. It made up 11% of revenue.
Advanced Micro Devices (NASDAQ: AMD) is Intel's biggest competitor.
Intel’s Massively Disappointing Earnings Release
The company announced a wave of bad news in its earnings results.
The company fell drastically short of adjusted earnings per share (EPS) estimates. Their figure came in at $0.02, compared to the $0.10 expected. Adjusted EPS declined 84% from a year ago. Revenue came in at $150 million below expectations at $12.83, down 1% from a year ago.
Another damaging piece of news was the company’s Q3 adjusted EPS guidance, which it pinned at a loss of $0.03 per share. Analysts expected income of $0.31 per share.
Intel also plans to reduce costs significantly. It announced a plan is underway to reduce operating expenses and capital expenditures by $10 billion in 2025. This cost reduction will include a "greater than 15%" cut in staff. The firm plans to implement most of this headcount cut by the end of 2024.
Lastly, the firm said it would suspend its $0.50 per share annual dividend starting in Q4.
Intel’s Strategic Errors and Decline
Intel doesn’t seem to have a great plan to climb out of the hole it has dug for itself. Problems might very well start at the top of the organization. Since CEO Pat Gelsinger took the helm in 2021, shares are down 65%. In the three years starting in 2018, shares were up 36%.
The company has made strategic errors, especially with its delay in entering the data center graphics processing unit (GPU) market. GPUs are simply much more important when it comes to AI data processing than CPUs and come with a higher profit margin.
NVIDIA (NASDAQ: NVDA) has been in this market for years and now has a massive advantage. NVIDIA’s operating margin sits at 60% compared to 1% for Intel. Intel is even losing its advantage in data center CPUs. The company’s market share for these products declined by 5.6% from the previous year, which AMD took from it.
Intel’s Band-Aid Solutions Won’t Fix the Problem
Intel has been moving in the wrong direction in nearly every way. The company is likely making a good decision to cut its dividend so that it can reinvest cash into growth areas.
The decision to cut staff could also be appropriate, depending on how they redeploy their workforce afterward, but it will also cause turmoil in the short term. These moves feel a bit desperate, making it look like the firm is doing something to change without fixing the root problem.
A solid argument can be made that leadership needs to change so the firm can survive and take advantage of opportunities to thrive. It has done the opposite in the current CEO’s tenure.
An abundance of Wall Street analysts dropped price targets for Intel after the earnings release. Among those 24 analysts, the company’s new average price target is $26.45, which implies an upside of 25%.
