Intel stock pops on earnings, analyst says there's 'cautious optimism'

Key Concepts

• Intel's Q3 Earnings: Revenue, adjusted EPS, and Q4 guidance.
• Foundry Business: Operating loss, improvement from previous year, future opportunities, and customer acquisition.
• AI Strategy: Role of CPUs in the AI era, leveraging Nvidia's dominance, and potential for Intel-based ASICs.
• Manufacturing Nodes: 18A, 14A, and their significance for future products and foundry services.
• Leadership and Turnaround Plan: Pat Gelsinger's (referred to as CL Lip Bhutan) strategy, deal-making, and focus on customer-centricity.

Intel's Third Quarter Earnings and Outlook

Intel's third quarter earnings report shows $13.7 billion in revenue, exceeding analyst expectations of $13.15 billion. The adjusted earnings per share (EPS) for the quarter was 23 cents, also surpassing projections. However, the outlook for the fourth quarter presents a mixed picture. Intel is forecasting adjusted EPS of 8 cents, which appears to be lower than estimated. Revenue for the fourth quarter is projected at $13.3 billion at the midpoint of the range, slightly below the expected $13.4 billion. It's noted that this guidance excludes revenue from Altera.

Foundry Business Performance and Prospects

Intel's manufacturing arm, Foundry, reported an operating loss of $2.3 billion for the third quarter. While this loss was wider than anticipated, it represents an improvement from the previous year. CEO Pat Gelsinger (referred to as CL Lip Bhutan) stated that "AI is accelerating, demand for compute and creating attractive opportunities across our portfolio."

The discussion highlights that the Foundry business is a key area of focus for the next year, with significant upside potential tied to both product volumes and opportunities with external customers. Despite ongoing investments in the sector, there hasn't been a significant increase in capital expenditures (capex) yet, which would typically signal investment in next-generation nodes like 14A. The current focus is on execution, with the ramp-up of Panther Lake and Clearwater Forest, which are based on the 18A node. These are described as high-end chips, and Intel is noted to have better wafer economics for these products compared to when they were manufactured at TSMC. This is expected to set Intel up for strong performance in the coming quarters and a robust 2026, particularly in the PC and data center markets.

A primary concern for investors has been the Foundry's significant expense and the need to secure external customers and revenue opportunities.

Intel's AI Strategy and the Role of CPUs

A key question raised is Intel's position within the AI mega-trend and its strategy to create competitive products. The perspective presented is that the role of the CPU in both desktop and server environments remains crucial in the AI era, and may even become more important. The data center CPU market is seen as a growth opportunity in both dollar value and volume.

A strategic lever for Intel is its relationship with Nvidia. The argument is that Intel can leverage Nvidia's dominance across the AI stack, particularly in data centers, and tie its CPUs more closely to Nvidia's upside. While this might not appeal to those seeking Intel to directly compete with GPUs or dedicated AI ASICs, becoming the preferred CPU headnote for Nvidia presents a significant upside opportunity. The discussion acknowledges the current dominance of Nvidia in the AI accelerator market and suggests that being tied to Nvidia is a net positive for Intel in both client and server segments. However, the importance of not abandoning the development of Intel-based GPUs or ASICs for inference is also mentioned.

Attracting External Customers for Foundry and 14A Node

The success of Intel's Foundry business hinges on attracting external customers, especially for its next-generation 14A manufacturing process. Policymakers in Washington are keen on Intel's success for geostrategic reasons.

To attract these customers, Intel needs to demonstrate customer engagement and work with Process Design Kits (PDKs) for 14A to showcase its quality. Industry feedback suggests that many in the supply chain were waiting for Intel to deliver on its product roadmap, specifically Panther Lake and Clearwater Forest on 18A, before taking the Foundry seriously. The success of these products is seen as a validation of Intel's process and packaging technology, encouraging a deeper look at 18A.

Intel needs customer wins and wafer commitments for 14A, which will also feed into 18A and 18P. These commitments are crucial for Intel to solidify its plans for 14A.

Pat Gelsinger's Leadership and Turnaround Plan

Pat Gelsinger's (referred to as CL Lip Bhutan) turnaround plan, initiated in March, is acknowledged as requiring time. He is described as a "very good dealmaker," citing the beneficial deals with the government and Nvidia. Further strategic deals are anticipated. Gelsinger's approach is characterized by customer-centricity, focusing on what is needed to foster partnerships with Intel and Intel Foundry.

Positive developments include improvements on the balance sheet and better cost control. The current quarter's performance is seen as evidence of progress. The successful ramp-up of 18A products is expected to positively impact the Foundry business. Gelsinger's leadership is viewed as dynamic and willing to adopt different approaches to deal-making. However, the sentiment is that everyone will feel more confident once several customer commitments are secured for Intel Foundry.

Synthesis and Conclusion

Intel's Q3 earnings exceeded revenue expectations, providing a positive initial signal. While the Q4 guidance shows some caution, the long-term outlook for Intel's Foundry business and its role in the AI era appears to be the primary focus. The successful execution of its product roadmap, particularly the 18A node with Panther Lake and Clearwater Forest, is critical for validating its manufacturing capabilities and attracting external Foundry customers. Intel's strategy to leverage its relationship with Nvidia for CPU growth in the AI market is a key element. Pat Gelsinger's leadership and deal-making prowess are seen as assets, but tangible customer commitments for the Foundry business are the ultimate measure of success for his turnaround plan.