Last week, investors sent Intel's shares plummeting back into 2013. Following weaker-than-expected quarterly figures, job cuts and a dividend cut, the share price literally imploded. The chip manufacturer lost around a fifth, or the equivalent of over USD 30 billion, of its market value within a few minutes. The tech share is now trading at its lowest level for more than a decade. Investors are now rightly asking themselves: is the fall in the share price exaggerated? And is there now an entry opportunity?
To find an answer, a thorough analysis of the current situation is required. First, let's take a look at the latest interim report: as expected, sales fell by 1% to USD 12.8 billion in the second quarter. However, there were different developments in the divisions. The Client Computing Group, Intel's core business with desktop and notebook processors, was able to increase revenues by 9%. By contrast, the networking business declined, as did the promising server division, which also includes artificial intelligence (AI) products. Ergo, Intel is still not benefiting from the AI boom.
So while there were no major surprises in terms of sales, the bad news predominated on the profit side. Adjusted for one-off factors, quarterly earnings shrank to USD 0.02 per share, while analysts had hoped for USD 0.10 per share. The situation is even worse on a non-adjusted level. On balance, Intel reported a net loss of USD 1.6 billion, compared with a surplus of USD 1.5 billion in the same period last year. The weak performance is mainly attributable to the company's own chip manufacturing division Intel Foundry, which made a loss of around USD 2.8 billion on sales of USD 4.32 billion.
However, the weak performance is not without consequences. CEO Pat Gelsinger immediately put the red pencil to work. The 63-year-old wants to get the once world-leading chip manufacturer - in the 1980s and 1990s the "Intel Inside" logo was a valuable imprint on PCs - back on track with a cost-cutting program worth billions. To this end, more than 15% of the total of around 125,000 jobs are to be cut. "I need fewer people at head office and more people in the field to look after customers," explains the company boss. Through restructuring, Gelsinger plans to reduce operating expenses to USD 20 billion this year and to USD 17.5 billion in 2025. In order to save money, Intel will also be cutting its dividend for the time being.
Tough cuts, but they will not lead to immediate success. In the current third quarter, Intel expects sales of between USD 12.5 bn and USD 13.5 bn, which would correspond to a significant decline of 12% on the bottom line. The market had expected sales to be around USD 1 bn higher. The bottom line is also expected to be in the red again. The loss is expected to amount to around USD 1 billion.
In order to remain a player on the chip market in the future, not only must Intel's restructuring concept work, it is also crucial that the group does not completely lose touch with the competition when it comes to AI. NVIDIA currently dominates the market, followed by AMD. The technical lead of the two is also reflected in their market capitalization. The current market capitalization of around USD 85 billion corresponds to only around 3% of the market value of NVIDIA and around 40% of AMD. In order to get a bigger slice of the AI pie, CEO Gelsinger highlighted his AI accelerator "Gaudi" at the recent Computex 2024 in Taiwan. In his view, the architecture offers the "desired GenAI performance with a price-performance advantage that enables wide choice and fast deployment times at a lower total cost of ownership." The coming quarters will show whether customers will be convinced.
The sharpest fall in the share price for four years also coincided with the disappointing US labor market report, which caused a minor tremor across Wall Street. Even though Intel shares are likely to see price target cuts and earnings revisions in the coming days and weeks, the deep dive could mean that most of the disappointment has already been dealt with. From a technical perspective, a bottom could be formed in the USD 20 range. This level already served as support between 2010 and 2012.
A consolidation at the current level would be the ideal environment for the new soft callable barrier reverse convertibles on Intel. These securities, which benefit from the recent explosion in volatility, offer above-average returns even in a sideways movement. With a maximum term of 18 months - the first soft call observation date takes place after 6 months - the CHF variant offers an extremely attractive coupon of 11.00% p.a. for a single BRC. The USD-denominated counterpart even offers an annual interest rate of 15.00%. It is important that the barrier at 49% of the initial level is not touched, which in turn equates to a generous risk buffer of 51%. This means that the Intel share can fall even further without any loss of earnings. The barrier level is in an area that has not been reached since 1996.
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