Intel Rallies After Giving Hope of Recovery in Second Half

(Bloomberg) — Intel Corp. shares jumped after the chipmaker promised a recovery in the second half, leading investors to look past a disappointing forecast for profitability in the current quarter.

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The company predicted a return to free cash flow in the second half and said gross margins — a closely watched measure — would begin to widen. That helped send the shares up more than 6% in late trading after an earlier decline.

The company also painted a more optimistic view of the broader PC industry, saying it expects shipments to reach 270 million units this year before increasing to about 300 million units annually in the future.

A massive pileup of inventory, weak demand and the loss of market share have put Intel in a historic hole, forcing it to plow billions of dollars into new production technology. Investors have been skeptical that the chipmaker can catch up with rivals, and the stock plunged nearly 50% last year. Though the shares had begun to recover in 2023, Chief Executive Officer Pat Gelsinger still needs to offer concrete evidence that Intel’s finances are improving.

Gelsinger, who took the top job in 2021, has laid out a plan to build new factories and develop new production techniques at a record pace — making that the keystone of his push to make Intel the industry’s leader again. But the company faces a steep drop in demand for personal computers, and it’s been struggling in data center processors, where it once had the technological edge.

Read More: Intel’s ‘Worst Is Over’ Scenario Faces Earnings Test

In the near term, Intel’s financial outlook still looks dim. It expects a loss of 4 cents a share in the second quarter, excluding some items, the company said Thursday. That compares with the 2-cent average estimate of analysts.

That initially sent shares down more than 2% in late trading, before a later rally. They had closed at $29.86, leaving them up 13% this year.

The revenue outlook was a bit brighter, with the company predicting sales of $11.5 billion to $12.5 billion. The midpoint of that range exceeds the average analyst estimate of $11.7 billion.

Intel predicted that gross margin — the portion of sales remaining after deducting the cost of production — would be 37.5% in the second quarter. That compares with an estimate of 41%.

When its factories were home to the industry’s most cutting-edge production and its products were dominant in the server and PC markets, the company regularly posted a margin of more than 60%.

In the first quarter, Intel reported a loss of 4 cents a share, excluding some items, better than the 16-cent loss analysts had predicted. Revenue came in at $11.7 billion.

That beat analysts’ projection of $11.1 billion, but sales has come down sharply in recent years. Intel had quarterly revenue of more than $20 billion as recently as 2021.

Client computing, Intel’s PC chip business, generated $5.8 billion in revenue. That compares with an estimate of $4.95 billion. Data-center sales were $3.7 billion, versus an average projection of $3.51 billion.

“We delivered solid first-quarter results, representing steady progress with our transformation,” Gelsinger said. “While we remain cautious on the macroeconomic outlook, we are focused on what we can control.”

After PC manufacturers were unable to meet the massive surge in demand during pandemic lockdowns, the market is now awash with unwanted inventory. Now that the world’s population has gone back to school and work, the industry is struggling to adjust to evolving levels of demand.

First-quarter PC shipments slumped 29% to 56.9 million units, taking them back below the levels of early 2019, according to IDC. That puts the industry on course to come in more than 100 million units shy of its 2021 total.

Intel’s strength in the server processor market once cushioned it from the ebb and flow of the PC business. Server chips, the central components of machines that run the internet and corporate networks, are much more expensive and profitable than those that go into laptops. But in that area, Intel has lost market share to rival Advanced Micro Devices Inc. and in-house efforts by major customers such as Inc.’s AWS.

(Updates shares starting in first paragraph.)

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