Intel is coughing and the market is worried it is sick

Intel’s 3rd quarter reports released last night (Thursday) led to a sharp drop of about 10% in the company’s stock in late trading. Will stay for a while longer.

There are a number of reasons that have led to this situation.

The main decline in Intel’s performance is in the data center division – the data centers – which has so far jumped upwards.

Intel CEO Bob Swan. Sales crash for government customers and organizations Photo: Bloomberg

The division’s revenue has dropped by about 10% cumulatively, and the reason for this is the crash of sales to government customers and very large organizations (enterprises) of about 47%. This is compared to the growth it enjoyed in the corresponding quarter last year of about 30%.

It is important to note that sales in the cloud computing field, of the same division, actually grew by about 15%, but this would have been surprising if they had not grown given the situation.

The use of cloud computing services has skyrocketed in parallel with the massive increase in work from home under the auspices of the Corona plague, and computer sales have also skyrocketed to an unprecedented volume in the last ten years.

But the precarious state of the global economy as well as the decline in the volume of tax collection has burdened government customers and enterprise organizations. This means that their current budgets do not allow for the investments that Intel expected in equipment such as servers or storage arrays.

In addition, the prices of chips for data centers fell by about 15% as competition in the field increased. The threat to Intel’s leadership in this area seems more tangible than ever.

A shake-up in the computer chip market

The change in Intel’s business and CEO Bob Swan’s attempt to focus its operations led to the sale of the Internet of Things (IoT) division last April for $ 150 million or the storage chip division this week to SK Hynix for $ 9 billion. At the same time, investment in the graphics chips division has increased and the company expects to launch graphics chips that will compete with Anvidia and AMD in the coming year. All this will not cover the fact that the computer chip market, the second and most profitable division of Intel this quarter, is undergoing a shake-up.

Both AMD and Anvidia have shown this year that they are well-equipped to threaten Intel’s undisputed control of PC chips.

Apple’s move to self-developed computer chips based on British chip giant ARM’s technology, as well as Microsoft’s growing support for these chips, which it is developing for some Surfs models, have shown that the computer market is due to the abandonment of the old Vintel model. Almost 40 years in the field.

The continued delay in the launch of 7-nanometer chips, as well as the fact that most of its competitors did introduce such chips does not make it any easier for it to show that it still dominates the market. Although chip size is not the only measure of its quality, but like resolution in smartphone cameras, it is an easy measure for those who are not versed in the technical details to understand.

The smaller the chip, the more advanced, economical and efficient it is. Although Intel introduced the 11th generation chips of the i7, i5 and i3 series with a promise of impressive performance – but these still feature a 10 nm engraving, the same one that was introduced years ago. And for a tech company, stepping on the spot – or at least its appearance – is a bad sign for investors.

Expect to beat analysts’ estimates

The company presented its estimates for the coming quarter during an investor talk earlier tonight, and it expects to beat Wall Street estimates. The company estimates that in the 4th quarter its revenues will be about $ 17.4 billion compared to analysts’ expectations of about $ 17.34 billion.

Also in the earnings line, Intel estimates that it will earn about 1.10 per share, compared to estimates of about $ 1.06. If Swan eventually decides to cut the production division and transfer at least part of it to external contractors – including the 7-nanometer chips – as hinted at in recent months, there could very well be further structural changes later on.

But whatever it is, Intel will in any case have to introduce moves that will show the market that it is trying to become more efficient instead of sticking to the internal production tradition.

It may be doing what HP did several years ago – separating the manufacturing divisions from the consumer and enterprise markets. But it could also be that it would simply give up its production division and transfer its business to Samsung, TSMC or another manufacturer.

Possible moves are not what is missing and it is clear that until the market stabilizes, this is not an issue that will be decided so quickly. For investors this is a period of uncertainty and it is something that is sometimes difficult to deal with. And Intel will have to improve their confidence if it wants to get through this period.