Intel strategy delay likely to distract from Q4'20 earnings – analysts

Intel Corp. is expected to report strong fourth-quarter 2020 earnings Jan. 21, driven by PC sales that continue to grow by double-digit percentages. But analysts say key questions about Intel's long-term strategy are unlikely to be answered ahead of the company's CEO transition next month.

In a Jan. 13 announcement about the upcoming departure of Intel CEO Bob Swan, the company said it expected to exceed its fourth-quarter 2020 guidance, which predicted revenue of $17.4 billion and non-GAAP EPS of $1.10. It also promised an update Jan. 21 on its progress in developing a 7-nanometer chip. Delays in releasing the new chip have weighed on Intel's competitive position as rivals move ahead on 7-nm and smaller processors.

Analysts said it will take months if not years to turn around Intel's manufacturing missteps, and they do not expect a substantive update on key issues surrounding Intel's future strategy until after incoming CEO Pat Gelsinger, a former Intel CTO, takes over Feb. 15.

Any reported progress on the 7-nm chip would be good, but updates on how Intel plans to fix its manufacturing problems and whether it plans out outsource any chip production would be better, said Stacy Rasgon, managing director and senior analyst at Sanford C. Bernstein & Co. LLC. Intel last year indicated it was considering contracting with third-parties such as Taiwan Semiconductor Manufacturing Co. Ltd. to manufacture its leading-edge products or to add capacity in manufacturing other product categories.

"It really is not clear what we're going to hear [on Jan. 21]," Rasgon said. "We were supposed to get some color during earnings about the big plan, but that's probably on hold until the new guy [Gelsinger] gets a chance to get into the job and get his bearings."

Intel has not been forthcoming on how it plans to counter competition from companies like Advanced Micro Devices Inc., which has been gaining share rapidly in the desktop market and, to a lesser extent, in the data center market. Intel's inability to keep up with the pace of development set by its competitors has kept its share price low compared to the soaring values seen by AMD and NVIDIA Corp. in recent years, analysts said.

Intel's revenue remains far ahead of Nvidia and AMD, but its growth has not kept pace with the smaller companies. In the third quarter of 2020, Intel reported revenue of $18.33 billion, down 4.5% year over year, compared to Nvidia's $4.73 billion in revenue and AMD's $2.80 billion. Revenue growth for both of the two Intel competitors was up more than 50% year over year in that period.

Intel is likely to talk about its new data-center chips during the Jan. 21 earnings call, but the company is unlikely to see much sales from those chips until the second quarter, about three months behind Intel's earlier estimate, according to Matthew Bryson, a senior vice president of equity research at Wedbush Securities.

Swan's announcement last July that Intel would bolster its manufacturing capacity with a "pragmatic" approach to outsourcing also caused rampant speculation that the company might be reconsidering whether it could still afford to operate as an Integrated Device Manufacturer (IDM) designing and manufacturing its own chips, Bryson said.

Analysts do not expect to hear discussion regarding those issues during the fourth-quarter earnings call, however.

"Changes in the IDM strategy will dictate Intel's future over a relatively long period of time," Bryson said. "Once you go down that road, to some extent you can't get back. And you would probably not want to make those changes just prior to having a new CEO coming on board."

Despite the near-term uncertainty, the change in leadership is likely to benefit to Intel in the long run, Rasgon said.

"I think the next few quarters will be good. I also think some of the [market] share losses [to AMD] will continue. And it looks as if the product roadmap is probably baked for the next two to three years; insource or outsource, that will be harder to change," Rasgon said.

One of the predominant concerns about Intel during the past few years is that its leadership — Swan's background was in finance — was not the best fit to steer the company through engineering and technical problems. Gelsinger, by contrast, comes from an engineering background, though it will take time for him to implement the necessary changes, analysts cautioned.

"Regardless what choices he makes, you're talking product cycles that are 18+ months," Bryson said. "He would have probably been a better choice two or three years ago."