Intel Q4 2023 – Too risky

A series of unfortunate events.

• Intel reported good results but guided badly as inventory corrections and market dynamics in several of Intel’s segments added together caused weak guidance which triggered a correction in what has otherwise been a terrific run.
• Q4 2023 revenues / EPS were $15.41bn / $0.54 ahead of estimates of $15.16bn / $0.54 but things really fell apart when it came to the guidance for Q1 2024.
• Here, Q1 2024 revenues are expected to be $12.2bn – $13.2bn ($12.7bn) well below forecasts of $14.25bn which was enough to send the shares down 10% in after-hours trading.
• This has not been caused by one issue but a series of small corrections and weaknesses that together are enough to cause a significant miss compared to what the market had been led to believe.
• Mobileye is suffering a correction (see here), FPGAs are also going through the same thing while the data centre is struggling with the current focus on spending on GPUs rather than CPUs.
• Furthermore, Intel is also suffering from an inventory correction in its traditional packaging products as a hangover of the accelerated purchasing caused by supply concerns in previous years.
• This is unfortunate as it is masking the steady recovery at Intel and its good execution on the “5 nodes in 2 years” promise that hardly anyone thought was possible.
• As an echo of Mobileye’s comments, these corrections look likely to last for most of 2024 and so in terms of growth and profitability, Intel has another difficult year ahead of it.
• By the time this correction has worked its way through the system, Intel will then be faced with what is potentially the greatest challenge to its business which is a credible launch of Arm-based processors into the Windows laptop market.
• Intel has been fortunate in that Apple does not make processors for anyone else, and so its losses as a result of the M-series have been limited to Macs which are still only a small part of the market.
• However, Qualcomm has launched the X Elite series which it aims to have in Windows laptops in H2 2024 and on the performance numbers launched to date, this looks dangerous.
• This is because X Elite can put up numbers that are just as good as Intel’s and do so at substantially lower power consumption.
• This means that consumers should be able to purchase a laptop with the same size, performance, and price as its Intel equivalent but with twice the battery life.
• However, there is one gigantic caveat which is software.
• This is the third time that Microsoft has attempted to run the Windows operating system on Arm and its track record to date is execrable.
• The port needs to be so good, that the consumer can’t tell the difference between an Intel laptop and an Arm laptop in terms of the user experience and ability to use all of the available software.
• There can be no ifs and buts and there are no prizes for second place.
• I am certain that if it is not perfect, then this going to be a big flop.
• However, Apple has demonstrated precisely how this should be done and it has managed its migration from x86 to Arm flawlessly.
• This will be more difficult for the Windows ecosystem because Apple is one company and does everything itself whereas in Windows there is Microsoft, Qualcomm (and there will be others), the subsystem makers and the PC makers.
• It is impossible to say how well this is going to go until one can get one’s hands on a device but crucially, Apple has demonstrated that it is possible.
• Hence, I think the jury remains out until the middle of this year but if it works, then Intel is in real trouble.
• This is because the entire laptop market will be up for grabs with desktops likely to follow.
• This will also embolden the Arm ecosystem to have another go at the data centre which will put Intel under real pressure.
• This, combined with the execution risk on the turnaround (which is declining), is not the kind of risk I want to take when I am paying 24x 2024 PER.
• I would rather invest in the challengers where I still have a position in Qualcomm.