Intel Corp. (NASDAQ: INTC), in its first quarterly earnings report under the leadership of new CEO Lip Bu Tan, forecast revenue and profits lower than expected for the second-quarter. This disappointed investors.
This announcement coincides with escalating Sino/US trade tensions, and growing uncertainties around the global semiconductor market. The company believes that this could lead to a wider economic slowdown.
The US chipmaker’s shares fell 5.82% during premarket trade following a downbeat outlook, Wall Street assessing the dual challenges of weakened demand and geopolitical uncertainties.
The Q1 quarter was boosted by tariff-driven purchases, but Q2 was slowed.
In the first quarter, Intel reported stronger-than-expected sales, which CFO David Zinsner attributed to customers rushing to buy chips before potential price hikes due to tariffs.
Zinsner, during an analyst call following the earnings announcement said: “We anticipate that costs will increase.
The biggest risk is the potential impact of any pullbacks in spending and investment.
Intel’s June Quarter guidance was more expansive than normal, reflecting an uncertain business environment due to shifting trade policies as well as volatile consumer sentiment.
While US tariffs on chips remain unaffected, the company has warned that retaliatory actions from China – its largest market – could result in an 85% levied or higher tax rate for US made chips.
Demand for older chips increases amid the economic uncertainty
Intel’s older generation processors are in high demand, especially in the PC and server market.
Michelle Johnston Holthaus is the head of Intel’s Client and Data Center unit. She said that customers are choosing older chips to protect themselves from uncertain economic conditions.
Holthaus stated that “Macroeconomic worries and tariffs are causing everyone to hedge their bets.”
We are experiencing strong demand for older-generation parts, both in the client and datacenter segments.
This demand could be a lifeline in the short term, but it may also slow down adoption of Intel’s next generation AI chips for PCs.
Analysts hail cost cuts but warn of tariffs-driven challenges
Intel’s aggressive strategy to cut costs was praised despite the grim forecast.
The company has reduced capital spending and operational expenditures in marketing and R&D.
The analyst at CFRA Research, Angelo Zino wrote: “While we appreciate the increased cost-cutting effort, share loss will remain an issue. Meanwhile the second-half launch of Intel 18A is crucial.”
Intel is in a difficult position. The competitive pressures on the PC and Server markets are only increasing, while the company lacks the right offerings, according to our opinion.
Similar reservations were also expressed by other analysts.
JP Morgan has maintained its “underweight rating” with a price target of $20, predicting a weaker seasonal performance for the second half owing to ongoing headwinds due to tariffs and uncertainty in trade.
Morgan Stanley rates Intel stock as “equalweight” and has a target price of $23. It noted that Intel has focused on improving process technology but has not addressed deeper product flaws.
Intel’s firm said that it could benefit from a balanced approach, which includes manufacturing innovations and design innovation. This is what rivals such as TSMC do.
Evercore ISI also said that the CEO’s performance is “in-line” with its $23 goal, but acknowledged there are still significant challenges to overcome.
The brokerage stated that “the new CEO still has much wood to cut, although it appears he is off to a good start. We remain neutral and can be more positive if there are signs of improved execution or an increase in market share.”
What do analysts think about Intel restructuring?
Intel’s recent announcement of layoffs was another important development.
The company has confirmed that certain management levels will be eliminated, but it did not provide specific numbers of job cuts.
Bloomberg reported that Intel could cut over 20% from its staff.
Layoffs form part of an overall cost reduction strategy.
Intel expects to save another $1 billion next year. It has cut its target operating expenses by $500 millions for the year.
The move, however, has not done much to assure investors of the deeper challenges that the company faces: protecting and gaining market shares from rivals like AMD and Nvidia.
Intc’s traditional PC market and core server market appears to be in decline. Tariffs are putting additional pressure on the PC market…We anticipate continued losses in server CPU shares this year. IFS (Intel’s division that manufactures chips) will remain unprofitable in the near future. Management focused near term on restructuring/streamlining. “We remain on the sidelines here,” said Oppenheimer’s Rick Schafer, in a recent research note.
Schafer rates Intel’s stock as Perform with no price target.
Risks of trade wars compound macroeconomic concerns
The broader economy is also a headwind, as fears about a possible recession grow.
Zinsner said that the “fluidity of trade policies” in the US, and elsewhere has increased the likelihood of a downturn. He also noted that the higher costs resulting from tariffs would likely impact Intel’s profit margins.
It had been hoped that the company would benefit from an upturn in PC sales later this year due to AI adoption, and a fresh Microsoft Windows cycle.
Analysts say that the emphasis on cheap chips may derail these plans.
Michael Ashley Schulman is the CIO of Running Point Capital. He said, “In an uncertain economic climate, good enough beats bleeding-edge.” This is a macro-signal that should not be ignored.
Intel’s prospects in the near future depend on its ability to navigate trade policy turmoil, gain product competitiveness and execute a delicate turn-around under new leadership.
Uncertainty is the predominant theme for now.
This article Weak Q2 Guidance Drags Intel Shares; Analysts Cite Tariffs, Shrinking Market Share as Ongoing Risks appeared first on The ICD
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