Intel Faces Challenges Despite Q2 Gains, But Analysts See Signs of Recovery Ahead

Intel's second-quarter PC CPU shipments showed rare growth, signaling potential recovery for the company amid ongoing challenges. While Bernstein notes this positive development, the firm also highlights that Intel still faces significant hurdles, particularly in managing its inventory and market share dynamics.

Intel Sees Rare Q2 Growth in PC CPU Shipments, But Market Challenges and Inventory Issues Persist

Bernstein reports that Intel's PC CPU shipments increased in the second quarter, a rare positive development for the company after its calamitous second-quarter results earlier this month. These shipments were delivered when the PC market experienced sequential growth and surpassed pre-coronavirus demand. Stacy Rasgon, an analyst, reports that the PC market, which is dominated by Intel and AMD, expanded by 9% in Q1. This expansion follows a 1% annual increase in Q1, but Intel's challenges still need to be resolved, as the analyst asserts that PC shipments continue to surpass CPU shipments.

According to Bernstein's data, the PC market experienced a 9% increase over the previous quarter and a 1% annual increase in Q2, surpassing the typical seasonal performance. Significantly, the annual growth rate of 1% represented a two-percentage-point increase from the 1% decline in Q1 and a three-point increase from the 2% contraction in Q4 2023.

Intel and its smaller competitor, AMD, depend on their sales channels to dispose of inventory. This also renders them susceptible to supply chain disruptions, as a mismatch between demand and supply can result in too much or too little inventory in the channel. As a result, the final prices either decrease or increase, depending on whether there is a glut or a shortage.

According to Bernstein, the personal computing central processing unit (PC CPU) channel for desktops and notebooks appears to be clearing. In recent years, this channel has been "overstuffed," Intel has frequently been accused of dispatching an excessive amount of product to maintain shelf space, even when the supply exceeds demand.

The data indicates desktop and notebook CPU shipments exceeded end-product shipments by 9% in Q2. According to Bernstein's data, the margin for notebook CPUs was 10%, higher than the analogous figure for desktop CPUs, which is 7%.

Intel Faces Pressure on Margins Amid Inventory Challenges and Incentivized Sales, Says Bernstein

In a recent report by Wccftech, during the first quarter, the aggregate desktop and notebook CPU channel margins were 18%, 22%, and 9%, respectively. This is favorable news for Intel. CEO Patrick Gelsinger stated during the company's second-quarter earnings call that "modest inventory digestion" would result in a diminished Q3 report. CFO David Zisner also mentioned that "lower than anticipated revenue in the back half of the year" was "putting pressure on gross margins and earnings."

Intel should benefit from reducing channel inventory in the future. Bernstein also provides additional information regarding its revenue, disclosing that approximately $1.3 billion of Intel's Q2 revenue was generated through incentivized sales. These factors tend to delay sales, and the research firm observes that when combined with $1.6 billion in incentivized sales from Q1, the results are comparable to those of Q3 and Q4 2022, when these figures were $1.5 billion and $1.7 billion, respectively.

In its Form 10-Q for Q2 2024, Intel outlined that "Incentives offered to certain customers to accelerate purchases and to strategically position our products with customers for market segment share purposes, particularly in CCG, contributed approximately $1.3 billion to our revenue during Q2 2024. The impacts of these Q2 2024 incentives were contemplated in our financial guidance for Q3 2024, as included in our Form 8-K dated August 1, 2024."

Incentivizing sales means that Intel's customers buy more chips than they typically would, which can lead to an overfilled channel. Bernstein seems to agree with this as it shares, "Intel has been pulling forward sales for quite a few quarters, with recent ‘incentivized sales’ levels approaching the elevated levels we saw exiting 2022, and hence are paying for it now."

In the second quarter, Intel gained a percentage point in the desktop market and lost a percentage point in the notebook market due to its market share conflict with AMD. BarronBarron notes that Intel's share price has reached a level nearly equivalent to its tangible book value of $19.5, which is the approximate liquidation value of a company, as a result of the share price bloodbath that followed its disastrous earnings report. This could suggest that the stock has reached a proverbial bottom. Bernstein has assigned Intel a Market Perform rating and established a $25 share price target.