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Intel (INTC) Earnings Thursday After The Bell

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Intel (INTC - Free Report) will be the first major US semiconductor company to post its Q4 earnings Thursday after the bell. The demand for chips is surging as the digitally driven global economy recovers faster than anyone could have anticipated. 2020 drove years of digitalization in just months as the pandemic forced the world online.

Best-in-class and largest chip contractor, TSMC, has set the tone for Q4 semiconductor earnings. It illustrated a significant uptick in semiconductor demand with an exciting earnings report that revealed the sector's bright future. TSMC announced in its earnings yesterday that it would be spending $25 to $28 billion to further develop its advanced chip manufacturing to meet the swelling demand.

Now the markets are looking to Intel's earnings to see if the recent organizational changes will push the enterprise back into a competitive positioning, following years of falling behind the curve.

According to Zacks Consensus, analysts anticipate INTC to report an EPS of $1.10 on sales of $17.44 billion, illustrating double-digit declines from the same period last year on both metrics.

INTC has a history of beating both top and bottom-line estimates. The price action will be driven by Intel's chip timelines and pipelines of innovation. Intel still has strong corporate relationships that drive its profitability, but they will need to push their innovative curve if they want to maintain those connections.

Systemic Changes

Intel has finally said enough is enough after a strongly worded letter by Third Point hedge fund CEO Daniel Loeb in December that urged the company to make systemic changes in the interest of the US technology sector. Intel's Chairman is replacing their seemingly unadaptable CEO, Bob Swan. After years behind the innovative curve, the company is finally deciding to make organizational changes, and investors like what they are seeing.

VMWare CEO Pat Gelsinger will be taking the helm of the legacy semiconductor business on February 15th. The markets are enthusiastic about an adaptable CEO who has proven himself as a successful tech leader, with a "distinguished track record of innovation, talent development, and a deep knowledge of Intel", according to Intel Chairman Omar Ishrak.

Gelsinger has 40 years of tech experience, including 3 decades at Intel, where he became the company's first chief technology officer.

Along with the change at Intel's helm, the company announced it had "made strong progress on its 7nm process technology and will provide an update on its January 21st earnings call."

Since this announcement INTC has surged 10% into earnings but remains down over the past 52-weeks. Far underperforming its cohorts.

Recent Disappointment 

Intel has disappointed me in recent years, with supply chain issues and production delays that have pushed the chip king out of step with the innovative curve. The previously viewed "value" CPU player, AMD (AMD - Free Report) , is now taking market share in the space that Intel has been building for decades.

Leading semiconductor fabricator TSMC (TSM - Free Report) has seen a massive boost in recent quarters as its cutting-edge third-party manufacturing services appear to be unmatched. The biggest and baddest chip innovators like Nvidia (NVDA - Free Report) , Broadcom (AVGO - Free Report) , Qualcomm (QCOM - Free Report) , and even Apple (AAPL - Free Report) all utilize TSMC's best-in-class manufacturing, and Intel has been forced to do the same.

This chip pioneer saw its highest valuation near the end of the dot-com bubble. Its shares hit north of $75 a share ($538 billion market cap) and capitulating 83% of its value in the 2 years that followed.

Intel has been falling behind Moore's Law, which states that transistors' density in integrated circuits doubles roughly every 2 years. This has come to mean that digital chips become twice as efficient and halve in cost every 24 months in laymen's terms.

Co-founder of Intel, Gordan Moore, formulated this theory over a half-century ago, but his legacy enterprise has fallen behind the curve.

In 2020 Intel was dethroned as the largest US chipmaker by Nvidia. The company has continued to lose its market value as investors price in its increasingly apparent systemic obsolescence.

The stock was trading at 11x forward price to earnings before the recent announcement, substantially below the industry average, which sits above 24x.

What's Next For Intel?

Intel needs to make some significant systemic changes to get back to its innovative roots. Replacing the CEO was a good start, and the progress in its 7nm chip technology is a positive sign, but they are still far behind TSMC who is already manufacturing 5nm chips and working on 3nm transistors. In fact, TSMC's 5nm chips accounted for 20% of its 4th quarter revenue. TSMC was making 7nm chips 2.5 years ago, which means Intel will be 3 years behind on a generous timeline.

What you really want to focus on in this earnings release and the subsequent call is the systemic changes I discussed. Is Intel planning on selling off/spinning off any of its operations or acquire any strategic businesses? Is the enterprise going to utilize more third-party fabricators like TSMC to keep up with the competition, or is their in-house manufacturing going to catch up to the innovative curve?

These are going to be the real market movers for INTC moving forward.

Final Thoughts

2020 has digitalized the world by years in a matter of months with the need for mobile devices proliferating and the 4th Industrial Revolution taking off. Businesses in every sector are leveraging more digital technology than ever before, which means the demand for chips has never been greater. I expect that 2021 will be a strong year of growth in the semiconductor space. Let's just hope that Intel can get back to a competitive positioning as this space rapidly advances.

For more on Big Tech earnings check out: What's Next For Big Tech?: Earnings & The Blue Wave

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