Earnings Outlook: Intel earnings may be overshadowed by memory dump

Intel INTC, -2.10% is scheduled to report earnings after the bell on Thursday, but analyst commentary has already steered away from earnings results to its announced plans to sell its flash-memory, or NAND, business to Korean chip maker SK Hynix Inc. 000660, -1.73% for $9 billion. In the U.S., the largest suppliers of NAND chips are Western Digital Corp. WDC, +1.38% and Micron Technology Inc. MU, +2.20%, both of which held about 14% of the total global market each in 2019, according to data from T4 Labs Inc. SK Hynix had 10% of the market compared with Intel’s 9%.

“While we still believe Intel’s future is predicated upon its ability to execute on its core processor road map, this transaction should be viewed as a clear positive for Intel,” said Wedbush analyst Matt Bryson, who has an underperform rating on Intel with a $51 price target.

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Bryson also said Intel’s NAND divestiture would be “one less noncore operation that could divert management’s attention.”

After announcing the deal on Monday, expect management commentary in Thursday’s conference call to focus on the memory deal, and how it affects the rest of the company moving forward. That might be beneficial to Intel, as the chip maker heads toward a decline in profit and revenue amid difficulties with its engineering process.

What to expect

Earnings: Of the 36 analysts surveyed by FactSet, Intel on average is expected to post adjusted earnings of $1.11 a share, down from the $1.14 a share expected at the beginning of the quarter and the $1.42 a share reported in the year-ago quarter. Intel forecast $1.10 a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.20 a share.

Revenue: Wall Street expects revenue of $18.24 billion from Intel, according to 34 analysts polled by FactSet. That’s up from the $17.86 billion forecast at the beginning of the quarter, but down from the $19.19 billion reported in the year-ago quarter. Intel predicted revenue of about $18.2 billion. Estimize expects revenue of $18.77 billion.

Stock movement: Intel stock fell more than 13% over the third quarter following the company’s announcement that it would delay release of its next generation of chips. In comparison, the Dow Jones Industrial Average DJIA, +0.54% — which counts Intel as a component — rose 7.6%, the S&P 500 index SPX, +0.62% advanced 8.5%, and the tech-heavy Nasdaq Composite Index COMP, +0.48% gained 11%.

What analysts are saying

Susquehanna Financial analyst Christopher Rolland, who has a neutral rating on Intel and $53 price target, said he expects “another constructive quarter ahead” for the chip industry as a whole.

Intel should benefit from a slight uptick in PC sales, Rolland said, but sees as a neutral for the company an expected decline in server CPU sales that may normalize in the fourth quarter.

Raymond James analyst Chris Caso, who has a market perform rating on Intel, expects a “modest upside” in the fourth quarter for Intel. As for Intel’s next-gen chip challenges, which he expects management to address.

“What we don’t yet know is management’s remedy plan, which presumably will involve some degree of outsourcing, which could be highly beneficial to cash flow – if outsourcing can be implanted in time,” Caso said. “We have too much respect for Intel management to believe that they will sit on their hands in the face of these challenges, and will therefore reserve our view until we hear of management’s plan.”

Jefferies analyst Mark Lipacis, who has a $54 price target on Intel, said he had upgraded Intel to a “hold” rating at the beginning of the year based on an assumption that the company divested its memory business and streamlined its expenses. That upgrade, however, was predicated on Intel’s whole memory business, he said, noting the company is keeping its Optane memory business.

“Intel’s memory business has been a money-losing venture over the past five years,” Lipacis said.

Of the 39 analysts who cover Intel, 12 have buy or overweight ratings, 17 have hold ratings and 10 have sell or underweight ratings, with an average price target of $57.38.