Intel: Good Quarter, Bad Vibes, Guidance Rattles Investors

Key Points

• Intel's recent financial report highlighted a contrast between beating first-quarter expectations and providing a cautious outlook for the immediate future.
• Following the earnings release and guidance, investors are now closely watching for tangible signs of progress in Intel's strategic growth areas beyond restructuring.
• Successful product execution, such as the upcoming Panther Lake launch and advancements in the company's foundry services division, will be key catalysts for the company's future.

Intel NASDAQ: INTC reported seemingly positive first-quarter financial results, exceeding expectations for adjusted earnings per share (EPS) and revenue.

However, this initial positive sentiment quickly faded due to the company's very cautious outlook for the second quarter, forecasting breakeven non-GAAP earnings per share.

This stark contrast caused Intel's stock price to decline and highlighted an ongoing identity challenge for the chipmaker under its new CEO.

Despite significant cost-cutting measures, the market is now focused on identifying the next significant positive catalyst that indicates a true turnaround beyond just operational efficiency.

From Q1 Beat to Q2 Retreat

Despite a significant beat in Q1 non-GAAP earnings compared to estimates, underlying challenges persist. Non-GAAP EPS saw a substantial 28% year-over-year decrease to $0.13, and revenue remained flat at $12.7 billion. The GAAP picture was weaker, with the net loss widening to $(0.19) per share from $(0.09) in the same quarter last year. Gross margins also faced pressure, falling nearly six percentage points YOY to 39.2% on a non-GAAP basis, driven by ongoing cost issues and product mix.

Segment performance offered some encouragement: while Data Center and AI (DCAI) revenue grew by 8% YOY, the larger Client Computing Group (CCG) revenue declined by 8% as demand shifted towards older, lower-margin processors due to economic uncertainty. Notably, Intel Foundry Services (IFS) continued to experience significant losses, with a $2.3 billion operating loss for the quarter.

This mixed Q1 performance created a challenging backdrop for the Q2 guidance, which led to an adverse market reaction. Intel projects Q2 revenue between $11.2 billion and $12.4 billion, indicating a sequential decline even at the higher end (midpoint of $11.8 billion). Non-GAAP gross margin is expected to decrease further to around 36.5%, and the forecast of $0.00 non-GAAP EPS suggests no immediate improvement in profitability. 

During the earnings call, management cited several reasons for this cautious outlook: increased macroeconomic uncertainty, which could reduce spending; the uncertain effects of global trade policies and tariffs; a product mix leaning towards lower-margin client chips; ongoing start-up costs for the Intel 18A manufacturing process ramp-up; and even capacity limitations on the older Intel 7 process node, which is currently experiencing surprisingly high demand.

Intel's Restructuring vs. Market Skepticism

Faced with significant challenges, Intel, under Tan's leadership, is implementing a substantial operational restructuring. Reports just before the earnings announcement detailed potential layoffs exceeding 20% of the workforce, which the CEO characterized as essential for organizational flattening, bureaucracy reduction, and a more focused engineering approach. This follows previous job reductions and aligns with lowered operating expense goals, targeting approximately $17 billion in 2025 and $16 billion in 2026. 

Further emphasizing capital discipline, the 2025 gross capital expenditure target has been decreased to $18 billion from $20 billion, driven by improved utilization of existing assets under construction. These internal actions accompany portfolio simplification efforts, including the recent sale of the NAND memory business and the anticipated divestment of a majority stake in the Altera FPGA unit, expected to be completed in the latter half of 2025. Additionally, a stricter return-to-office policy, requiring four days per week on site starting in September, has been announced to enhance collaboration.

Despite the magnitude of these changes, the market reacted negatively to the Q1 report and Q2 guidance. Intel's stock price experienced a sharp decline on April 25th, erasing recent gains and underscoring its underperformance over the past year (roughly a 35% decrease). Intel’s analyst community quickly responded by lowering price targets on INTC stock across numerous firms.

The consensus rating has solidified around Reduce, with an increase in Sell recommendations (now 5 out of 31 analysts) compared to only one Buy rating. The average 12-month price target has fallen to $22.23, suggesting a limited upside from the current trading levels of around $20.38 as of the April 29 open. 

Searching for the Spark

Investors are questioning what could positively impact Intel's stock, given a projected difficult Q2 and cost reductions perceived as reactive. The market seeks tangible progress in key strategic areas beyond operational efficiency. A significant catalyst could be the successful rollout of Intel 18A process technology, expected in the latter half of 2025, followed by products like 'Panther Lake' client CPUs by year-end. Achieving these ambitious timelines with strong performance and yields would affirm Intel's manufacturing strategy.

The Intel Foundry Services (IFS) division also presents a vital opportunity. A significant design win announcement from a major external semiconductor firm ('whale' customer) would substantially validate Intel's foundry aspirations and its competitiveness against Taiwan Semiconductor Manufacturing Company NYSE: TSM.

Moreover, any clear indication of Intel holding or recovering market share in its core Client Computing and Data Center businesses against AMD NASDAQ: AMD and emerging ARM competitors would be well-received.

A faster-than-expected decrease in IFS's considerable operating losses could also significantly increase investor confidence. Lastly, improvements in the global economy or a reduction in geopolitical trade issues affecting the semiconductor sector, while not directly controlled by Intel, could offer a beneficial boost.

Waiting for Proof

Intel's first-quarter earnings beat and subsequent forecast offered little clarity regarding its competitive standing and turnaround progress. While the earnings exceeded expectations, the pessimistic short-term outlook overshadowed this success, perpetuating market uncertainty about the company's direction.

The newly appointed CEO, Lip-Bu Tan, is tackling head-on challenges with substantial layoffs and cost-cutting measures aimed at promoting cultural change and improving efficiency. Nevertheless, investors indicate that these internal reforms alone are insufficient to drive significant growth. 

The emphasis now rests on successful execution and demonstrable results. Until Intel provides verifiable achievements through new product introductions such as Panther Lake on the crucial 18A process, secures major foundry clients, protects its market share, or establishes a clear path to profitability for its foundry services (IFS), its stock will likely remain under scrutiny, requiring substantial positive developments to restore investor confidence.