Intel’s cloud business ‘potentially losing share to AMD’: Analyst

KeyBanc Capital Markets Managing Director & Senior Research Analyst John Vinh joins Yahoo Finance to discuss Intel earnings and the outlook for cloud computing.

Video Transcript

Welcome back. Intel reported quarterly results after market close just a few moments ago earlier today. And that stock is down in the after hours session. For more, we have John Vinh, KeyBanc Capital Markets managing director and senior research analyst, here with us to discuss.

John, just taking a look at these results, it looks like Intel’s weaker than expected earnings forecast is what investors are reacting to, with the stock down now. But what was your biggest takeaway from these results?

JOHN VINH: yeah. A little bit of a mixed bag here, for sure. The quarter was really, really strong, you know, top and bottom line. Client computing and data center group were both above expectations. But certainly– kind of a miss on the– the outlook was a little bit weaker. Revenues were a little bit higher. EPS was a little bit lower. You know, gross margins were also a little bit lower.

I would say that one of the other kind of key takeaways from the result was that the cloud data center outlook was a little bit weaker. Yesterday, we’ve seen Microsoft Azure up over 40% growth. But Intel’s cloud data center group revenues are only down 5%– seems to suggest to me that they’re potentially still losing share to AMD at this point.

So how do they change that around? I mean, this is what they’re going to be asked. But if that’s the case, I mean, you’ve got these investors right now who are concerned about, you know, not only this first quarter, but– I don’t want to use the word “losing the race.” But how do they catch up?

JOHN VINH: It’s–unfortunately, can just take a lot of time, right? You know, Pat Gelsinger, the CEO, has put forth a very ambitious roadmap to kind of get back to parity with AMD and regain share. But unfortunately, it’s going to take them at least over a year. They do have a new chip, Sapphire Rapids, that’s supposed to ramp at the end of the year. But that’s not really going to be a meaningful volume production until the first half of 2023. So it’s going to take quite a bit of time for them to turn things around. And I think there’s still some uncertainty whether that’s actually going to happen because AMD is not going to sit on its laurels. And they’re going to continue to innovate as well.

Do you think Intel is spending too much relative to the share it may gain through these efforts to regain share from AMD?

JOHN VINH: I actually don’t. You know, as a former bull, you know, last year, for most of the year, we had an overweight rating. And as a former bull, I think Pat and the new management team is doing everything you’d want you’d want. You’d want them to invest aggressively at this point in time. You do want them to kind of invest heavily in Capex and demonstrate that they’ve got a commitment to not only get to parity with AMD, but to regain share.

You know, obviously near-term, you know, the optics aren’t going to look good. The margins are going to be lower. The increase in Capex is going to hit the gross margins. But from an investment perspective, I think Intel is doing all the right things. It’s just going to take time to turn things around.

From, you know, the standpoint of the company, though, there were analysts who are critical of, you know, their build-out plans. And if I’m understanding correctly– if I’m not, correct it so that we do get a good picture of this– it’s almost as if they’re damned if they do, damned if they don’t because they do have to, as you point out, catch up to their competitor. But yet analysts get very upset when they spend as aggressively as they are to try and do that.

JOHN VINH: yeah. You know, I think that’s why we’re at a sector weight rating. You know, this is going to be a long-term investment. You know, many investors, and especially many analysts on the sell side, are, you know, really focused on kind of near-term optics, right? You know, if you can’t get the quarter right, you can’t manage margins, and you can’t manage profitability while turning things around, you’re typically not going to get rewarded for some of these longer term investments. But if you do have a much longer term horizon, you know, I think you’re going to be aligned with what management’s doing here.

I’m wondering– you, of course, cover a number of companies in the semiconductor space. I’m wondering, with the sell-off that we’ve seen recently across tech stocks and across semiconductors underperforming the broader market, do you think this has been overdone?

JOHN VINH: I certainly think so, you know? And I understand it, right? You know, if you look at the stocks over a longer period of time, right, we’ve had three years of significant appreciation, the stocks itself, over 200% over the last three years. Never in the history of the stocks have we had four years of appreciation. And if 2022 is an up year for the stocks, that would be a fourth year, right?

So obviously, investors are getting really nervous in terms of where we are in the semi cycle at this point in time. However, we’re still very constructive at this point in time. We think, you know, this cycle is different. I think the demand creation that the pandemic has created with kind of the work-from-home cloud data center growth, 5G infrastructure– I think these are, you know, secular drivers that we’ve never had. So we still are looking for a really strong year of growth. And certainly, we think things are a little bit overdone here.

All right. We’ll leave it there for now. John Vinh is KeyBanc Capital Markets managing director and senior research analyst. And we thank you so much for your time.

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