Intel shares saw a rally on Friday following their better-than-expected second-quarter earnings report. However, analysts are now raising concerns about the company’s future outlook, specifically regarding the impact of the artificial intelligence (AI) trend on technology spending.
There is growing apprehension that customers may prioritize purchasing AI-related chips over traditional Intel processors, resulting in near-term pressures for the chip maker. Intel CEO Patrick Gelsinger acknowledged this risk during the earnings conference call, stating that they anticipate some softness in the data center business in the coming quarter. He further explained that major cloud customers have heavily invested in building high-end AI training environments and are thus allocating more of their budgets towards AI.
Gelsinger, nonetheless, expressed optimism about Intel’s long-term prospects in the field of AI. He emphasized that greater demand for server central processing units and AI accelerators, which can enhance AI performance, will benefit the company in the future.
However, BofA Global Research analyst Vivek Arya remains skeptical. Arya notes that Nvidia currently dominates the AI semiconductor market with its graphics processing units that are specifically designed for AI applications. In a research note, Arya reiterates his “Underperform” rating for Intel, highlighting the company’s vulnerability to the cannibalization of legacy CPU-based computing by AI compute.
Moreover, there are doubts surrounding Intel’s ability to consistently beat financial expectations. The company exceeded anticipated June quarter revenue with $12.9 billion, compared to the projected $12.1 billion. Despite this positive performance, uncertainty remains.
As a result of these concerns, Intel’s shares were up 6.5% to $36.79 on Friday afternoon.
Conclusion
While Intel’s recent second-quarter earnings were promising, the company faces potential challenges due to the rising prominence of AI and the subsequent shift in technology spending priorities. While Intel predicts long-term benefits through increased demand for their processor units and AI accelerators, analysts remain skeptical, citing Nvidia’s dominance in the AI semiconductor market. Additionally, doubts loom over Intel’s ability to consistently exceed financial expectations. As Intel continues its AI journey, only time will tell whether the company can navigate these challenges successfully.
Analysis on Intel’s Performance and Prospects
Intel, the chipmaking giant, has seen significant sales outperformance, primarily driven by its client processor business – the semiconductors used in consumer and work PCs. While this positive outcome could be attributed to an unexpected boost as the sector navigated through high inventory levels, it might represent a one-time occurrence.
According to analyst Arya, Intel’s PC business has mostly stabilized and is expected to grow modestly in line with the market. However, there are no exceptional benefits anticipated from inventory-related channel refills. On the other hand, the company’s data-center unit continues to face challenges. Traditionally, Wall Street has had a stronger focus on this segment, which sells higher-priced server processors to corporations and cloud computing companies. Unfortunately, the outlook for this sector is not as favorable as that of the client processor business.
During the June quarter, data-center revenue witnessed a year-over-year decline of 15%, accompanied by a modest operating loss. Analyst Stacy Rasgon from Bernstein described the results as objectively negative, highlighting ongoing headwinds in the data center space and key businesses still incurring losses.
Interestingly, Taiwan Semiconductor Manufacturing Chairman Mark Liu recently observed that demand for AI-related chips is diverting sales away from traditional server chips. This shift in demand aligns with surveys conducted among technology buyers and major chip executives, which indicate a strong prioritization of artificial intelligence projects. Consequently, there might be a prolonged pause in spending for non-GPU chips, lasting several quarters or even years, rather than just being a short-term occurrence.
It is important to recognize that significant technological shifts rarely transpire in just one quarter. Therefore, it remains crucial for Intel to adapt and navigate these evolving industry dynamics to sustain long-term success.
