Intel just reported its 2022 Q4 earnings and oh boy were the results ugly.
Adjusted Earnings Per Share came in at only 10 cents per share.
This missed the already low analyst expectations of 20 cents per share.
That is Intel’s worst quarter since 2009.
Revenue came in at $14.04 billion, missing analyst expectations of $14.45 billion.
Q4 Revenue is down 32% year over year.
On top of this, the company issued grim 2023 Q1 guidance.
Intel is forecasting continued declines with revenue of $10.5 billion to $11.5 billion.
Also, expecting GAAP EPS of -$0.80 and adjusted EPS of -$0.15.
Not good.
All of this news has caused Intel stock to fall nearly 10% after hours.
Today, I’m going to analyze Intel’s latest earnings report, explain what they announced
about their dividend payment, and share my thoughts as an Intel shareholder.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video.
Going into this quarter, poor performance was the expectation.
However, they managed to fall below that low bar.
Intel’s financial performance has been declining quarter after quarter throughout 2022.
This is as the PC market weakened, chip shortage ended, and oversupply started in some of Intel’s
biggest segments.
On top of this, macroeconomic conditions have worsened.
This is a recipe for poor economic performance.
At the same time, Intel is investing massive sums of money in growing future manufacturing
capacity.
Overall, semiconductor demand is expected to double over the next decade.
Additionally, Intel is under a business transformation to open up manufacturing for other chip designers.
The goal is to grow a foundry business model similar to Taiwan Semiconductor.
If successful, that would set-up Intel in a much stronger business model.
That is a multi-year journey though.
It also happens to be a horrific time to be spending massive amounts, while you’re earning
less than ever.
In 2022, Intel had -$4 billion in adjusted free cash flow.
This is off a total of $15.4 billion in cash from operations.
They saw improvements in Q4, with $7.7 billion in cash from operations and $3.06 billion
in adjusted free cash flow.
That is a good sign.
While listening to the earnings call, management mentioned that they were planning to be free
cash flow neutral in 2023.
However, with the weak environment it’s likely they will be negative again.
With Intel, their largest business segments are all declining year over year.
Client computing group, which is their PC business, is down 36% year over year for Q4
and 23% for the full year 2022.
This segment is the worst impacted and the weakness will continue into 2023.
The PC market is terrible right now.
The overall market saw a 28.1% sales drop in Q4, the worst change ever seen.
One major factor here is the work from home demand in 2020 and 2021.
These are very hard comparables to match.
Think of all the different companies which got laptops for their employees to work from
home.
Combine that with every school that bought laptops.
My sister is a teacher and she mentioned that now every single kid in school has a supplied
laptop.
Think of the massive difference that is from the 1 or 2 carts they used to have for the
whole school.
Consumers bought up PCs at record rates in 2020 and 2021, but declined to upgrade those
relatively new PCs in 2022.
That trend is expected to continue for the first half of 2023.
Analyst’s are expecting the PC market to recover in late 2023 to 2024.
On Microsoft’s earnings call, they said to expect ‘PC market weakness’ for the
foreseeable future.
Luckily for Microsoft, that is an important business segment, but one of their smallest.
For Intel it’s the exact opposite.
However, this is not the end of the world.
It’s important to zoom out and think longer term here.
On Microsoft’s call, CEO Satya Nadella highlighted that "usage intensity of Windows continues
to be higher than pre-pandemic, with time spent per PC up nearly 10%".
What this means is the total addressable market and demand for PCs has still grown.
It may take time for that upgrade cycle to be realized again in PC sales.
Intel’s second largest segment, Data Center and AI is down 33% for Q4 year over year and
15% for full year 2022 compared to 2021.
One positive sign is that unlike Client Computing the datacenter did not decrease more from
Q3.
It actually grew $100 million.
On the earnings call, Pat Gelsigner mentioned that despite competitors fighting for market
share in new products sold, it's important to remember that Intel has near 95% server
market share in total active products.
Gelsigner argued that this consumer relationship, along with improved product offerings, will
lead Intel to continued datacenter strength.
Also, he mentioned that they have a strong product roadmap in the datacenter rolling
out over the next year.
Long-term, the data center will likely be a growth driver for Intel.
So given all this news, what am I doing with my Intel stock?
The 2023 outlook is incredibly poor.
If I was looking for a short-term trade I would not be buying Intel right now.
However, as a long-term holding it is appealing.
My decision for holding my Intel shares through this financial pain is based on the dividend.
The company just declared their quarterly dividend, keeping it in line with the previous
amount.
On the earnings call, the CFO stated that the board is very disciplined with capital
allocation and are committed to retaining a competitive dividend.
You might ask, how can they do this when losing money next quarter?
Well, the same way Oil companies do when prices are unprofitable.
They use the balance sheet to support the dividend in times of pain.
Intel has $23 billion in cash on hand and a reasonable relationship with debt.
If needed, they could easily support the dividend until the business becomes profitable again.
If Intel cuts the dividend, then I will choose to sell the stock.
I’m not going to wait for that multi-year turnaround if there is no dividend to hold
me over.
There are many other market opportunities available.
In the meantime, I’ll get close to a 5% dividend yield and wait for the long-term
strategic plan to play out.
This will take many years.
However, if executed the current valuation could lead to fantastic returns.
In my opinion, the bull case relies on Intel’s ability to grow their foundry services business.
That could be the golden goose.
It’s possible that over 5-10 years that business could grow to rival their client
computing and data center segments.
Under that situation, Intel would be a steal at current prices.
That said, this is all just my opinion and you should do your own research before making
any financial decisions.
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