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Market Insights

Intel - the nightmare before Halloween

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We’ve been talking chips quite a bit lately. Micron’s struggling with big inventories, Apple is cutting production forecasts, AMD guided Q3 revenues lower by $1 billion due to lower-than expected PC demand, and now it’s Intel’s turn to feel the pain…

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Unlike many of the other chip stocks, Intel wasn’t able to push on to new highs during the pandemic. While competitors have returned to 2019/2020 levels, Intel is now back to 2014 prices and much of the early hope for a big turnaround has faded.

It’s not all about Intel. The sudden drop in PC demand is weighing on the sector as a whole. Analysis by Canalys found that shipments fell by 18% in Q3 alone!

The global PC market faced a significant drop in demand in the third quarter of 2022. Total shipments of desktops and notebooks fell 18% to 69.4 million units, as existing weakness in the consumer and education segments was exacerbated by more cautious IT spending by businesses.

Notebook shipments suffered the most, posting a year-on-year decline of 19% with 54.7 million units shipped. Desktop shipments proved more robust due to less reliance on consumer spending, falling 11% year-on-year for a total of 14.7 million units.

Adverse macroeconomic and industry factors including high inflation, rising interest rates and bloated channel inventories have dented the PC market’s momentum, and are likely to persist into 2023.

Perhaps more worrying is the breadth of the demand drop. Often, strength in one customer segment can offset weakness in another, but this is across the board. Personal, business, education, all slowing together.

Intel has seen the writing on the wall and is planning thousands of job cuts according to Bloomberg. To this point, David Zinsner, Intel’s chief financial officer, said after the company’s latest quarterly report that “there are large opportunities for Intel to improve and deliver maximum output per dollar.”

It’s long been known that Intel had lost the culture of innovation that originally propelled them to the pinnacle of the chip industry. Nowadays, the company is seeing off challenges from AMD & Nvidia across all sectors, including their lucrative data centre division where revenues plunged by 16% over the past year, while their overall operating margin fell to just 5%.

It’s not all bad news. At a recent Innovate event, Intel CEO Pat Gelsinger introduced Intel’s new lower-priced GPU (graphics card). Tech analysts think the company has spotted an opening. Nvidia is now heavily focused on high performance, high end tech, so perhaps there’s an opportunity in this more reasonably-priced segment of the market.

Nevertheless, Intel’s challenges are a long way from over. The industry has become a hotbed of innovation and competitors such as AMD & Nvidia operate with a far leaner 12-14,000 employees.

Intel has over 100,000 staff and 8-10 times the revenues. It’s far simpler to turn a smaller ship than an enormous tanker. However, the operation is underway. The combination of slowing demand and higher interest rates could weigh increasingly on the smaller firms just as Intel’s turnaround gathers steam.

Not investment advice. Past performance does not guarantee or predict future performance.

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