Intel earnings show 'things are looking up': Analyst

AI hype and rebound and personal Computing may be breathing life back into the chip Market Intel unexpectedly returning to profitability in the second quarter with results beating not only analysts expectations but the company's own guidance joining us now is Serena pastrini pajuri Raymond James managing director and Senior analyst Renee it's good to see you as Brad and I were talking about this earlier the narrative really seems to be not that things are turning a corner and getting better but just maybe that they're not going to get worse how are you viewing these numbers yeah so um Julie thanks for having me uh first you know Intel you know benefited significantly like many other semiconductor companies during the pandemic uh because of the PC boom and then that boom turned into a bust over the last few quarters so we are coming off of the troughs we are coming off of the lows and things are stabilizing uh from a demand standpoint the PC market is starting to stabilize and for Intel uh they have been undershipping the End Market because of the excess inventory you know buffer inventory of components uh you know built by customers during the pandemic so uh that inventory is being worked down so there it's in things are normalizing and and looking up for Intel so Serene when you look at the recovery for PCs and data centers what sort of numbers would you need to see to really see a convincing rebound or essentially a new normal post-pandemic yeah so you know just to kind of give you some numbers during the pandemic we were looking at close to 350 million units of PC shipments per year uh that has come down to about 250 to 260 million units and our expectation is that this is not a growth Market um you know I think Intel management believes that this is a growth Market uh maybe low single digits at best uh on the corporate side I think they're still in a relatively stable demand consumer is somewhat mixed and part of it is China as well overall our expectation is that you know it's going to be a stable Market but at the same time we do see an opportunity for Intel and other chip suppliers because you know of the functionality increasing uh potentially you know uh we do 4C potentially some AI functionality getting into PC so that helps the pricing the asps because you need more powerful CPUs going forward so that's a Tailwind to Intel but again our main um you know bull case on Intel is not predicated upon the PC business this is more on the data center side and also you know their manufacturing roadmap getting back on track is your base case also include them being being able to maintain profitability of course um you know if you look at Intel's profitability you know they're never lost I mean I think the last time they they lost many of us back during the you know financial crisis in 2009 and that was where one quarter so and that happened again you know in q1 of this year management was forecasting another quarter of losses but now you know they reported you know profitability this quarter um the free cash flow is still a little bit of an issue but even that is getting better uh they're spending you know a lot of capex on you know on manufacturing um but you know our expectation is that even free cash flow flow will turn positive second half of this year and that should also help the stock going forward but you know profitability and free cash flow is very important for us so Serena if you're focused on demand and data centers in particular the company did say sales were down 15 year-over-year in that division um right what's going to sort of change there that's going to help demand yeah so look I I think again even data center is another Market that benefited significantly during the pandemic uh because the work from home partly um and then now we are seeing a lot of Investments going to Ai and machine learning um AI requires you know specialized processors you know a gpus and accelerators um Intel doesn't have a strong position currently in that market you know that's dominated by Nvidia and as the spending is Shifting to you know AI related you know workloads uh there's an impact on the CPU Market where Intel is the dominant supplier uh but at the same time um you know the the cyclical correction the cyclical headwinds are fading even in you know data center CPUs and our expectation is that longer term AI will benefit not only gpus but also CPUs but in the short term there is some impact and that's the reason um even even with with all those issues uh in those numbers were better than expected even in data center so I think that's the reason the stock is reacting positively today and Serena as we look at the AI Story I mean on the earnings call we saw the pat gelsinger saying that Intel plans to build AI into everything that they build but as Sean Hollister from The Verge says Nvidia is selling the right kind of shovel in this AI Gold Rush how should we think about how Intel is positioning itself in this yeah so it's it's a very interesting Market um I mean AI is not new AI has been around for several years what changed uh since last year is uh the chat GPT what we call the large language models uh this is generative AI um so you know most of the you know generative AI applications are today uh are run in the cloud you know you have to train these massive models and you need a lot of compute and that's only available in the cloud uh you you can't simply do that you know in in Edge devices like PCS or servers so uh initially uh we expect in the most of the investment to be in data centers as a result uh but you know as applications emerge uh it's possible that we'll see you know local processing of AI applications especially as as we deploy some smaller models uh there's a lot of talk about for example personal assistance uh do you need to go back to the cloud every time you know you ask the personal assistant something right so if you have an application on your PC on your smartphone you will need a more powerful processors to run those PCS and smartphones as well so there is an opportunity there and Intel also participates in other markets uh in in you know 5G infrastructure for example so there's an opportunity to you know use AI applications I mean our view is that AI uh will win pretty much every application that we use every workload uh so anywhere there is compute and and you know Intel participates in that market and and I do see a benefit longer term but for short term I think most of the spending is going to gpus indeed well great having you on with your insights Serena pajuri there Raymond James managing director and Senior analyst thanks so much have a great weekend thank you

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Length: 6min 45sec (405 seconds)

Published: Fri Jul 28 2023