Intel stock falls despite the company's Q1 earnings beat and data-center sales slump more than 20%. Hans Mosesmann, Managing Director at Rosenblatt Securities, joins Yahoo Finance Live to discuss the chip makers' latest financial results.
Video Transcript
MYLES UDLAND: All right, welcome back to "Yahoo Finance Live" on this Friday morning. Let's take a look at shares of Intel under some pressure here after the company out with its latest quarterly report last night. We see the stock is off about 5% in early trading as the company continues to look at a multiyear plan to really transition and rightsize, turn around the business, however we want to frame that conversation. So let's get into some of the takeaways from this quarter and maybe the road ahead for Intel now.
Joining us here is Hans Mosesmann. He's an analyst over at Rosenblatt Securities. Hans, great to talk with you this morning. So let's just start with the current quarter and what you saw in there. As I see it, basically your estimates and the Street estimates were pretty much in line with what the company said if we back out that $650 million one-time benefit. And so $18 billion on top line, where do you see that number going in future quarters?
HANS MOSESMANN: Operating margins are going to go down. There's a huge investment that the company is going to be doing for this so-called Integrated Device Manufacturing 2.0, or IDM 2.0. They have yield issues. They have 7 nanometer cost issues. They have packaging issues.
It's going to take a couple of years, so operating margins are probably going to start going into the mid-20s entering 2022, which is interesting because AMD's margins are going to go into the mid-20s and to the high 20s next year. So you're seeing an interesting crossover there. So challenging times and Pat has-- has some work ahead of him, for sure.
BRIAN SOZZI: And Hans, what is-- I think the prevailing view on the Street is that Intel is behind its competitors. In what areas do you think Intel is behind its competitors? And when do you think they will start taking market share back?
HANS MOSESMANN: Well, it's going to take years. They're behind in terms of process technology. Just to give you a sense, three to five years ago, they were ahead of TSMC by one to two years. Now they're behind TSMC by two to three years. So-- so that's-- that's a heavy lift to cede to competitors like Nvidia, AMD, and Xilinx.
From an architectural perspective, the architecture of design, how you design a microprocessor, their architecture is very old, but they never bothered to innovate, because they had all this market share. AMD innovated over a five-year period of time, and now they have a better roadmap, so they have a micro architecture issue.
And to add insult to injury, the world of computing is going away from homogeneous CPU-only computing. It's going to accelerators like GPUs, and ASICs, and FPGAs. And Intel, through acquisition or even organically, has done very poorly. It's not their skill set. And to add on top of that, they want to get into the financial services businesses. So it's very many issues that they have to deal with will take many years.
JULIE HYMAN: And Hans, you've got a sell rating on the stock, actually. Do you think-- you say it's going to take many years. Are you even confident that they can achieve it, that they can catch up?
HANS MOSESMANN: I'm skeptical that they can ever catch up on the foundry side of things. In 2023 or 2024 when their-- when their 7 nanometer will be in production, TSMC is going to be at 3. You'd have to engage in some serious static analysis to make the case that they can catch up. You have to assume that TSMC, the best foundry in the world, is-- is going to have significant execution issues for Intel to catch up. It's very difficult.
From a process technology perspective, to say that you have leading edge and to take that knowledge and apply it to foundry services, it's a totally different skill set. Your process technology and your corporate culture has to be suited for dealing with customers that are always complaining and wanting very many things. Intel's corporate culture is take it or leave it. So there's a lot of heavy lifting here and it'll take many years.
BRIAN SOZZI: And Hans, do you think Intel needs to embark on a multiyear restructuring plan to strip out costs? And along those lines, is-- is Mobileye still a core asset inside the company?
HANS MOSESMANN: Mobileye, the gem of Intel. Out of all the acquisitions, Mobileye is truly remarkable what they're doing, how they're doing it. And part of the reason for that is that the deal was struck in a way that Intel would not really get too involved in the process, in the R&D side of things and on the innovation.
Regarding the model, the IDM 2.0 model, by definition per se, requires significant investment. That's why their operating margins are coming down, and they will come down for the next few years. For them to catch up, it's a multidimensional problem for them to do this. And they have to run faster, because they have to go to 5 nanometer very, very quickly.
So they're not going to cut costs. That was the previous CEOs kind of focus to kind of keep operating margins in that, you know, above 30% range. Now all bets are off. Until this IDM 2.0 model is achieved for the next several years, their OpEx is going to be growing at a significant pace, and sales growth is going to be ephemeral, at best.
MYLES UDLAND: And you know, Hans, finally before we let you go, just talk us through a little bit of how you're thinking about Pat Gelsinger now being the CEO at Intel. Had been a longtime Intel employee. He's a technical person first, and that certainly changes the ethos inside companies, whether you're from the finance department or the engineering side. How are you thinking about that change? Obviously investors were quite excited. But, as you've outlined here in detail, very complicated road ahead for him.
HANS MOSESMANN: Yeah, I mean, he's the guy. Based on our checks, he was the guy that was supposed to assume the role three years ago, not Bob Swan. There was some secondary issues that led to that not happening. So 3, 3 and 1/2 years ago, Pat Gelsinger would have had time to kind of respond to what Nvidia is doing in the front of acceleration, before AMD had started to gain traction from a design perspective with their EPYC and Ryzen processes.
Three years later, they're bringing in-- bringing him in late, as if, you know, it's fourth quarter, there's a couple of minutes left, and it requires a couple of touchdowns, Hail Mary-like. It's-- so he's been placed in a very difficult situation. He, from a corporate culture perspective, makes sense.
He's an engineer's engineer. He's charismatic. And he's a very good cheerleader. It's just that I think the Street is overestimating what he can do in the time frame. It's going to take many years.
MYLES UDLAND: All right, Hans Mosesmann with Rosenblatt Securities. Hans, I really appreciate you jumping on to talk through Intel's latest quarter. I know we'll be in touch.
The Link LonkApril 23, 2021 at 09:07PM
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