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Intel faces sharp revenue decline amid struggles in the chip market

Intel braces for most significant quarterly revenue drop in five quarters as investors await CEO Pat Gelsingerโ€™s plan to revive the struggling chip giant.

Intel is set to announce a significant drop in quarterly revenue on Thursday, which is expected to be its largest in five quarters. This decrease highlights the ongoing challenges faced by the US-based semiconductor giant as it loses ground in the data centre and personal computer (PC) markets. Intelโ€™s once-dominant market position has been increasingly eroded by competitors, with investors now focusing on CEO Pat Gelsingerโ€™s attempts to revitalise the company.

Gelsinger, who joined as CEO in 2021, has faced setbacks in expanding Intelโ€™s contract manufacturing business and missed opportunities in the generative artificial intelligence (AI) sector, which has boomed with demand for high-performance chips. Wall Street is anticipating an 8% drop in Intelโ€™s revenue to around US$13.02 billion, based on data from financial insights company LSEG compiled as of October 26. As investors await clarity from Gelsinger on the company’s future, the pressure is on to accelerate Intelโ€™s newest manufacturing technology.

Market doubts over Gelsinger’s turnaround strategy

The release of Intelโ€™s disappointing quarterly results in August cast doubt on the effectiveness of Gelsingerโ€™s plan to steer Intel back on track. Rosenblatt Securities analyst Hans Mosesmann commented that investorsโ€™ main concerns are whether Intel can recover and if Gelsinger is the right leader to drive this transformation.

Despite efforts such as job cuts and a suspended dividend, Intelโ€™s stock has fallen more than 50% this year, with the companyโ€™s market value dropping below US$100 billion. The August report has compounded uncertainty, with some investors calling for Intel to separate its manufacturing business from its chip design operations. Synovus Trust portfolio manager Daniel Morgan, whose firm holds shares in Intel and competitor AMD, noted that a move to spin off Intelโ€™s foundry business could attract investor support.

To regain confidence, Intel recently secured a new chip-manufacturing deal with Amazon.com, marking one of its first major contracts involving the companyโ€™s 18A process technology, a step forward in its advanced manufacturing capabilities. However, while Gelsingerโ€™s efforts have made some progress, they have not been enough to ease shareholder concerns.

Challenges in the chip and AI sectors

The challenges are further intensified by losses in Intelโ€™s foundry business, which analysts predict will report an operating loss of US$2.55 billion this quarter. The high costs of expanding Intelโ€™s fabrication facilities have weighed on its gross margins, which are expected to drop by over 7 percentage points to 37.9%, according to LSEG estimates. Gabelli Funds research analyst Ryuta Makino, whose firm holds Intel shares, pointed out that the foundry divisionโ€™s resource demands are primarily responsible for the declining gross margins.

Intel is also trying to tap into the AI chip market, which it sees as potential growth for its PC segment. However, the anticipated recovery in PC sales has yet to materialise, with sales expected to decline by over 6% in the third quarter. Meanwhile, Intelโ€™s main rival, AMD, has been gaining ground, with its PC chip revenue expected to rise over 18% in the same period. AMD is also making inroads into Intelโ€™s stronghold in server chips. Led by CEO Lisa Su, AMD has seen significant growth in data centre revenue, spurred by demand for AI chips. In contrast, Intelโ€™s data centre revenue is predicted to decline by 17%, marking this segment’s 10th quarter of losses.

The shifting market demand for AI-based graphics processors, a field in which Intel needs to expand, adds to the company’s challenges in maintaining its share of the server CPU market.

High expectations with limited room for error

As half of the 31 analysts covering Intel have revised their revenue projections downward since September, the consensus appears that Intel has little room for further disappointments. Gabelli Fundsโ€™ Makino commented, โ€œI will be very surprised if thereโ€™s another negative surprise, just because the expectations are just completely reset.โ€

With its quarterly results announcement looming, Intelโ€™s leadership must address these pressing issues to reassure investors and demonstrate progress. Whether through ramping up production on its advanced 18A technology, considering a strategic overhaul, or tapping into the surging AI market, Intel has critical decisions to make as it seeks to reclaim its place as a leader in the semiconductor industry.

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