Intel's (INTC) inauspicious revenue forecast has its stock plummeting in pre-market trading on Friday.
Shares of the semiconductor company have wiped out a month's worth of gains, giving pause to an overall surge in semiconductor stocks.
While the company beat analyst estimates on the top and bottom lines for the first quarter of 2019, its forecast for the rest of the year is much less bullish. Newly named CEO Bob Swan noted that revenue is set for its first year over year drop since 2015 in the company's Thursday evening earnings release.
"Our conversations with customers and partners across our PC and data-centric businesses over the past couple months have made several trends clear. The decline in memory pricing has intensified. The data center inventory and capacity digestion that we described in January is more pronounced than we expected. And China headwinds have increased, leading to a more cautious IT spending environment," Swan explained. "We've reassessed our 2019 expectations based on the challenges we're seeing."
Intel said it expects full year revenue of $69.0 billion compared to estimates of $71.05 billion and the $70.8 billion record revenue realized in 2018. The new guidance represents a $2.5 billion cut to previous estimates pinned to a second half rebound in memory pricing.
Full-year EPS guidance was also lowered to $4.35 per share, down about 5% year over year and $0.25 lower than Intel's previous forecast.
Data Center Deceleration
One of the striking data points comes from the data center, a core business and growth thesis for the company that came in well below expectations.
Data Center Group (DCG) revenue for the first quarter was recorded at $4.9 billion, down 6% year over year and the guidance advises further declines ahead.
"Our data-centric businesses are expected to decline in the high single digits year over year, as memory pricing declines weigh on our NAND business and DCG customers continue to consume inventory and absorb capacity," CFO George Davis told analysts. "We expect DCG to be approximately flat sequentially."
The demand environment was noted to be soft globally, with a "digestion" period expected over the next quarter after a rapid run up in customer demand from the end of 2018.
Stifel analyst Kevin Cassidy joked that the digestion period has turned into indigestion.
"We believe Intel will maintain its market share leadership for PC and data center processors although, in our view, the company has already been given credit for the quicker adoption rate of its latest generation Xeon Scalable Platform," he said.
As such, a pullback on tempered guidance is to be expected. He lowered his price target from $50 per share to $47 in anticipation of the difficulty while maintaining a "Hold" rating.
Less Promising Eastern Outlook
One of the markets most in need of digestion for data center is China, Intel's largest market by revenue generated.
Intel noted that cloud build-outs accelerated in late 2018 as worries of increasing tariffs promoted a more frantic build-out of chip inventories among Chinese customers.
"We see customers becoming more cautious in their buying patterns, with the most acute deceleration happening in China," George Davis commented. "Demand pressure is particularly evident in our data center business, where we are seeing a continuing inventory correction in enterprise and comms and capacity digestion among cloud service providers, who ramped consumption strongly in 2019."
The cloud business was noted by CEO Bob Swan as a particularly weak business expected to continue decelerating over the next quarter.
"What we're highlighting today as it relates to cloud is two things, that we expect the digestion to continue into Q2; that demand is going to be soft in Q2," Swan explained. "It's even exacerbated in China, where if you'll remember, through the third quarter last year our demand for cloud players in China was close to triple digit. That was negative in the first quarter. So overall, they're still in a digestion period, the cloud guys, and China has been even more dramatic in the first quarter and the first couple weeks here in the second quarter."
The outlook for the business is certainly not encouraging for investors spoiled by a record breaking run-up for the overall semiconductor sector (SOXX) , as the road to a second half rebound globally appears more treacherous than initially anticipated.
Still, some analysts advised the speed bump for the stock that had run over 20% year to date provides an opportunity to get a bit greedy while fear overtakes the semi market.
"While investors may be skeptical, the team's visibility toward second half inflections is improving with inventory in China being consumed, hyperscale cloud spending build plans becoming clearer and supported by a strong upgrade cycle of Cascade Lake products," J.P. Morgan analyst Harlan Sur said. "We would be buyers of INTC shares on weakness."
5G Moves Forward
One of the focal points of Intel's strategy is a build-out of 5G capabilities, despite its well-publicized exit from the 5G smartphone market following a surprise settlement between Apple (AAPL) and Qualcomm (QCOM) .
"2019 will be a foundational year for another disruptive technology, 5G," Swan told analysts. "When it became apparent that we don't have a clear path to profitability in 5G smartphone modems, we acted."
Swan framed the conversation about the company's exit from 5G phones as more of a strategic shift in focus to core competencies in IoT and PC end markets, rather than a defeat.
Analysts have largely welcomed this positive spin, noting the higher margins available for Intel if it whittles its focus to its largest existing markets.
"We believe this is a pragmatic approach by Intel to focus on its areas of expertise rather than chasing low margin business," Stifel's Cassidy commented. "In our view, 5G infrastructure design will have considerable overlap with current data centers - thus representing a more attractive market for Intel."
Swan added that the timing is key as 5G shifts should continue to aid the business.
"By acting now, we focus our 5G efforts on the transformation of the wireless network and edge infrastructure, where we have a clear technology advantage, market share to win, and a strategic role to play with customers," Swan said. "As networks cloudify, Intel is in a great position to win in this base station segment, where we expect to grow to 40% market segment share by 2022. The vast majority of the 5G market opportunity and profit is in the transformation of network and edge infrastructure, where we are now laser-focused."
Still, the long-date timeline for this profitability projection is doing little to stop the bleeding in the near term. Especially if a long term adversary like Advanced Micro Devices (AMD) can steal market share along the way.
Analysts are largely optimistic that Intel has significant upside in the long term. However, following a remarkable run into earnings, the near-term pain ahead and the second consecutive cut to estimates is likely to pressure shares persistently in coming months.
"The CEO transition combined with the tough environment for both demand and competition is driving the early stages of structural change," Morgan Stanley analyst Joseph Moore advised clients. "None of that will be painless."
So, while there may indeed be a turnaround touted for the long term, a pronounced pullback in the near term should take over ahead as the band aid on the bad news has been peeled off.
Shares fell nearly 8% about one hour before market open, setting the stock up for its lowest open since late March.