Intel’s CEO needs a path to profits to win over stock skeptics

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3 days ago

(Bloomberg/Ian King) — Back in April, Intel Corp.’s newly appointed Chief Executive Officer Lip-Bu Tan told investors on his inaugural earnings call that turning around the troubled chipmaker would take time. That was three months ago — and they’re already losing patience.

Sure, Intel shares are up about 19% since Tan’s appointment was announced in March, but that’s nothing compared to rivals like Nvidia Corp., which has seen its stock price soar almost 50% over the same period, and Advanced Micro Devices Inc., which has jumped 64%. So when Intel reports earnings on Thursday, its CEO will need to win over skeptics by laying out a clear path to profitability and revenue growth that will translate into significant stock-price gains.

“I’m hoping this report provides some answers,” said Joe Tigay, a fund manager at the Rational Equity Armor Fund. “There’s still a great opportunity in Intel, but while we still own some, we’ve cut our position to move into other chip stocks.”

Investors were excited when Intel named Tan to replace former CEO Pat Gelsinger. But that has cooled, as Tan has cut costs but is yet to plot a new direction for the chipmaker, which has suffered from market share losses and spending on costly new plants.

Wall Street expects Intel to report a loss of 31 cents a share in the second quarter on revenue of $11.9 billion, down 7% from a year ago, according to data compiled by Bloomberg. And the Santa Clara, California-based company isn’t expected to turn a profit or generate revenue growth until the middle of next year.

Tan has promised to slash operating expenses and to reduce capital spending by about $2 billion this year. But so far, the company has told about 4,000 of its workers — just 4% of its total headcount — that their positions are going away. Wall Street says much more is needed.

“The upcoming earnings event is all about a believable path to break-even profitability,” Lynx Equity Strategy analyst KC Rajkumar wrote in a research note. “But it takes more than mere cost-cutting. Revenue needs to grow as well.”

The key for Intel is cashing in on the build out of artificial intelligence infrastructure, perhaps the biggest bonanza the semiconductor industry has ever seen. But that market is dominated by Nvidia, and making inroads will be challenging. Investors also want to know that big customers are signing up to use Intel’s factories, and that its internally designed chips are back to winning market share.

The market isn’t optimistic about the company’s prospects. Of the 52 analysts tracked by Bloomberg that cover Intel, only four have buy ratings on the stock, while 42 are at hold and six say sell. The average 12-month price target of $21.93 suggests a decline of almost 7% from Intel’s Wednesday closing price of $23.49.

Bernstein analyst Stacy Rasgon, who has a neutral-equivalent rating on the stock, summed up the gravity of the questions facing Intel in a research note to clients on July 21.

“Do Intel numbers even matter at this point?” Rasgon said. “Can new products turn the share situation around or is it too late?”