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Intel stock suffers worst day of the year after analysts point to AMD as a reason for data-center weakness

Intel Corp. shares suffered their worst day of the year so far Friday, after an earnings report that beat expectations but showed worrisome declines in data-center sales.

Intel
INTC,
-5.32%

stock fell 5.3% to $59.24 Friday, their worst day since October. The chip maker released first-quarter earnings Thursday afternoon, which easily beat expectations overall but showed weakness in perhaps the most important segment at the moment: Data-center sales.

Intel’s sales of server chips dropped more than 20% year-over-year, missing estimates, as data-center sales have grown in importance amid the rise of cloud-computing and artificial intelligence-level workloads that require massive computing power. Intel’s management credited the drop to tough comparisons with last year’s total as well as “digestion” by the major cloud providers, which means they had already bought enough chips and were waiting to buy more.

Opinion: Intel’s new CEO needs to put this problem at the top of his list

Analysts added another reason that Intel failed to mention: Competition. Namely, the rise of Advanced Micro Devices Inc.
AMD,
+4.68%

as a true competitor in the server business, and expected gains for ARM Holdings PLC.

“Left unsaid, we believe this was also driven in part by share loss to both AMD broadly and internal ARM design at select customers,” Cowen analysts wrote, while maintaining an outperform rating and $80 price target.

“We attribute this at least partially to competitive pressure from AMD,” Oppenheimer analysts, with a perform rating on the stock, wrote. “Intel is defending its turf.”

“We think market share loss and associated pricing pressure a very likely contributor to the sharp DCG decline in revenue and profitability, and investors will find out next week when AMD reports,” Needham analysts argued, while maintaining an underperform rating.

AMD stock rose as much as 5% in morning trading, and Nvidia Corp.
NVDA,
+2.79%

— which is attempting to acquire Arm and plans its own server CPUs based on Arm’s technology — increased about 2%. While it will be a couple of years before Nvidia’s recently announced server CPU hits the market, analysts did foresee good competition for the x86 standard that Intel and AMD use for server chips.

Full earnings coverage: Intel stock falls despite earnings beat, as data-center sales slump more than 20%

“Our deep dives on companies that ported software to Graviton (ARM server CPU) from Intel x86 posted price performance improvements of 40%-50%,” Jefferies analysts wrote while maintaining a hold rating and $59 price target.

“We estimate that over the past 5 years, Intel processor revenue share in the datacenter declined to 68% from 98% as Nvidia and AMD gained share,” the Jefferies analysts added. “We think Intel’s share loss accelerates as ARM CPUs join Nvidia and AMD as share gainers in the datacenter.”

One potential selling point is availability. Mizuho analysts reported that lead time for customers ordering Intel’s Ice Lake server chips was about 1 week, while customers buying AMD’s Milan and Rome chips were waiting three months or more.

New Intel Chief Executive Pat Gelsinger promised Thursday afternoon to fight for market share in the server category, without mentioning exactly whom he planned to fight, and continued to lay out his plans to increase revenue and earnings. Analysts writ large believe his plans could have varying levels of success, but mean that Intel will be spending heavily in the short term with any results being more long term.

See also: Intel CEO says global chip shortages to last 2 more years

“Intel is set for a very challenging 2-3 years in terms of share loss, margin pressure, and heightened execution risk by juggling many more balls in the air than ever before,” wrote Rosenblatt Securities analyst Hans Mosesmann, an Intel bear with a sell rating and $40 price target.

“Elevated costs are substantial and early; benefits will be very forward-looking and profitability will drag the company’s margins,” Truist analysts wrote while dropping their price target to $69 from $73.

At least four analysts decreased their price targets on the stock in response to the earnings, though none of those changed their rating on the stock. Overall, 17 of 36 analysts who cover Intel rate the stock the equivalent of a buy, according to FactSet tabulations; 12 rate shares a hold and 3 call them a sell. The average price target as of Friday was $66.70, 12.6% higher than the going price.

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