Intel earnings: This analyst says the tech giant 'doesn't sound like they're in a great place'

Here's a detailed summary of the YouTube video transcript:

Key Concepts

• Intel's Financial Performance: Analysis of recent quarterly results, including revenue breakdowns by business segment.
• Manufacturing Process Nodes: Discussion of Intel's 10nm, 7nm, 18A, and 14A process technologies, focusing on yield rates and production ramp-up.
• Supply Chain Dynamics: Examination of supply constraints and demand for Intel's older versus newer generation products.
• Market Demand: Assessment of demand in the PC and server markets, including factors like Windows end-of-life.
• AI Market: Intel's position and roadmap for AI accelerators compared to competitors like Nvidia.
• Intel's Turnaround Strategy: The long-term nature of Intel's recovery and the role of investments.
• Foundry Business: Intel's strategy for its foundry services and the need for customer commitments.
• AMD's Performance: Analysis of AMD's recent stock surge and its competitive position in the AI market.
• Customer Commitments: The importance of securing customer orders before investing in manufacturing capacity.

Intel's Recent Performance and Analyst Reaction

Stacy Rasan, Managing Director and Senior Analyst at Bernstein, expressed surprise at the initial positive market reaction to Intel's latest results, noting that the stock has since "come back down to earth." While acknowledging that Intel "beat the quarter" and that core markets (PCs and servers) performed "a little better than expected," Rasan highlighted underlying issues.

Key Points:

• Surface-Level Positives: Intel reported better-than-expected performance in PCs and servers and indicated that "demand exceeds supply."
• Underlying Supply Constraints: The supply constraints are primarily on Intel's older generation parts (10nm and 7nm). This is because these older parts offer more value to customers than Intel's newer offerings. Furthermore, Intel has reportedly "gotten rid of like equipment to make those older parts a few quarters anyways ago."
• Customer Preference: The supply constraint is a consequence of customers preferring older, more value-oriented parts over newer ones.

Manufacturing Process and Yield Concerns

Rasan discussed Intel's comments on its new 18A process node, which is currently ramping into production.

Key Points:

• 18A Process Node: Intel's new process technology.
• Yield Concerns: The CFO stated that yields are "adequate for the ramp," but Rasan interpreted this as not being in an "ideal place."
• Timeline for Improvement: Intel suggested that yields might not reach desired levels until "the end of next year." This indicates a potentially longer-than-expected yield ramp.

Analysis of Business Segment Performance

Rasan provided a breakdown of Intel's business segments:

• Client Computing Group (PC Market): Revenue was up 5% year-over-year. Rasan noted that PCs are currently strong, with in-market shipments up almost 10% sequentially. However, he attributed this strength to the "Windows end of life" cycle, expressing concern that this could make the following year challenging as this temporary demand driver fades. He also believes CPUs have been "overshipping PCs for the last five, six, seven quarters pretty meaningfully," which could negatively impact the PC opportunity next year.
• Data Center (Server Market): Revenue fell 1% year-over-year. Intel claims supply constraints are limiting growth. For the next quarter (Q4), Intel guided for a "meaningful" sequential increase in data center revenue, prioritizing server capacity due to supply limitations. Client computing revenue is expected to decline sequentially in Q4 as Intel allocates capacity. Rasan hopes the server market will offer growth next year, but notes Intel is "losing a lot of share to their competitor" in this segment.
• Foundry Revenue: Revenue was down 2% year-over-year. Rasan clarified that this figure is "internal" and represents what Intel charges its product business to use its fabs, thus "doesn't mean anything" as a standalone indicator of external foundry business success.

Growth Opportunities and AI Strategy

Rasan outlined his perspective on Intel's future growth prospects:

• Realistic Growth Drivers:
  • Server Market: Potential for recovery, but challenged by share loss to competitors.
  • Client Market: Uncertainty about the sustainability of current PC demand due to the Windows end-of-life cycle.
• AI Market: Rasan described Intel's AI strategy as a "slog." He stated that Intel "don't really have much of a roadmap to speak of specifically on like AI accelerators and things to compete with Nvidia and others."

Intel's Turnaround and Financial Health

Despite the challenges, Rasan acknowledged positive aspects of Intel's situation:

• Improved Financial Position: Intel has a "better balance sheet" and "cash on the balance sheet," having reduced debt.
• New Product Ramps: They are ramping new products.
• Near-Term Market Improvement: Core markets are showing some near-term improvement.
• Long-Term Perspective: Rasan emphasized that Intel's turnaround is in its very early stages. He stated, "It took 10 years to break it. It's probably going to take 10 years to fix it." He believes it is "too early to claim victory."

Impact of Investments on Intel

Rasan discussed the influx of investments Intel has received, including from Nvidia, the government, and SoftBank.

Key Points:

• Breathing Room: These investments provide "breathing room" for Intel, which was "burning considerable amounts of cash" and had "a lot of debt."
• Funding for Expansion: The cash is crucial for Intel to "build out 18A and 14A and build out a foundry business in a bigger way."
• Total Investment: Including the sale of half of its Altera business and some mobile shares, the total cash infusion is estimated to be closer to $20 billion once the Nvidia money is factored in.
• Capacity vs. Customers: While the money allows Intel more time to build capacity, Rasan stressed that "before they need the capacity though, they need customers. And before they can get customers, they need to prove that they have capability."
• Customer Commitments: Intel has "a lot of quote unquote engagements," but Rasan noted it's "still very early." They likely won't know for another 18 months if the 14A process is good enough to drive "material customer commitments." Intel plans to build capacity only after securing these commitments.
• Reduced Precariousness: The investments have moved Intel from a "precarious position" seen six months ago.

Analysis of AMD's Performance

Rasan also commented on AMD's strong stock performance, which was up 7% and at a record high during the discussion.

Key Points:

• Market Share Gain: Rasan is "not surprised it's running today" because if Intel is supply-constrained and demand exists, that demand will likely go to AMD.
• AI Market Opportunity: While Nvidia dominates the AI discourse, Rasan acknowledged AMD's potential. He referenced Lisa Su's statement about a "$500 billion opportunity" in AI, where even a 5% share for AMD would represent a significant $25 billion. This is substantial for AMD, as they don't need to achieve the massive AI sales Nvidia likely requires.
• Tactical Setup: The near-term setup for AMD's earnings is "pretty good," with potential upside due to Intel's issues and strong end markets (servers).
• AI Numbers vs. Future Potential: While AMD's near-term AI numbers have been "lackluster," Rasan suggested this might not matter as much to investors who are focused on the "open AI deal" that is expected to materialize at the end of next year. This allows for "dreaming" about future potential.

Conclusion

Rasan's analysis suggests that while Intel has made some progress in improving its financial standing and initiating its turnaround, significant challenges remain, particularly in its manufacturing yields and competitive positioning in the AI market. The recent positive market reaction was, in his view, premature, and the company is still in the very early stages of a long recovery process. Meanwhile, AMD is benefiting from Intel's supply constraints and is positioned to capture market share, with investor focus shifting towards its long-term AI potential despite current lackluster AI sales figures. The overarching theme for the industry in the coming year might be the intersection of "dreams meet reality."