Earnings: Intel will face ‘tough’ few years, analyst says

Bank of America Senior Semiconductor Analyst Vivek Arya joins Yahoo Finance Live to discuss the plunge in stock for Intel following quarterly earnings, chip stocks, the value of computing, cost-cutting, and the outlook for semiconductor corporation Intel.

Video transcript

- Is this as bad as it gets for the chip giant? That's the big question. Or is there still more to come? Let's dive into it and what the Street is saying, with B of A Research Analyst, Vivek Aria. Vivek, maybe we start with that very question. Is this as bad as it gets for Intel?

VIVEK ARYA: Good morning. I think another shock in our report from Intel, of course, there is a cyclical aspect of it, that PCs were one of the biggest beneficiaries when we were all locked up-- right? --at our homes during COVID. So we are seeing the other side of it. So there is a cyclical part of it. Let's not forget that.

But I do agree with you that some of the problems are a lot more Intel-specific. They are a lot more exposed to PCs so the declines do hurt them more. But there are competitive risks, not just to AMD.

I would also mention that part of the PC market, for example, in the past, Apple would buy their processors from Intel. And now Apple is designing their own processors. So 10% of the PC market has gone away.

And there is a share shift towards arm in the PC side. So that's one problem that I don't think gets reversed. It gets worse. Then on the data center side, yes, there is a share shift to AMD and they benefit from that. I think the other very important issue that is happening under the surface is that there is a move from CPUs which Intel makes, towards accelerators.

So, for example, look at all the hype around generative AI and ChatGPT. Every one of those servers could have one or two CPUs, but has seven or eight GPUs. So almost four times the number of GPUs. And each of those GPUs is priced at five times the price of a CPU.

So, that, I think, is the other structural issue that Intel is facing, that the value of computing is moving from things they are good at, which is CPU, towards GPUs, which they are not good at. So I think there is no quick fix here. Maybe the cycle gets reversed a little bit. But we feel that the issues are a lot more structural.

- I mean, that makes it sound like Intel, effectively, Vivek, is going to become obsolete. Is that the case? Is there anything they can do? I mean, it seems late for them to sort of pivot into GPUs in a more decided way.

VIVEK ARYA: Right. They do have the power of incumbency. So, you know, what we spoke about really affects more of the cloud service providers. They are the fastest growing part of the market. So that part of the market, Intel faces the most competitive pressure. But if you look at parts of the enterprise, Intel has a very strong brand name, very strong presence.

There are many enterprise applications where you're really not trying to push the envelope as much. They're not growing that quickly. But, still, Intel has incumbency in those parts of the market. Some of their other businesses in programmable system solutions, some parts of automotive, they are doing fine. So I think over the next two or three years, we don't see Intel completely getting off the map. But it is going to be a tough slog.

And the challenge is trying to outcompete their fabulous competitors who are just focused on design so they can be very agile and they can take advantage of Taiwan Semis manufacturing and the cost structure. And on the other side, Intel has to also compete against Taiwan Semi from a manufacturing perspective. So I think they are facing two different challenges at the same time. So it's going to be tough going for the next few years.

- Vivek, maybe you can make sense of this. So we were just talking about Intel flagging on their call last night, looking at other value creating initiatives. Would that include a dividend cut? Do you think they have to raise cash to just drive the turnaround that they're trying to do over the next few years?

VIVEK ARYA: Yeah, so first on the topic of the dividend. We are of the opinion that dividend is at risk. Last year they were able to divest some of their McAfee business so they got some cash because of it. And there were a small amount of grants. Otherwise, on a gross basis they had a $9 billion cash burn. I think this year, also, on a gross basis, there is a $9 billion cash burn.

But they're going to get some government subsidies. Brookfield is investing in one of the fabs. So maybe on a net basis the cash burn is not as much. But it's just mind boggling how one can support a $6 billion dividend when there is so much of cash burn in the core business. So I think that is at risk.

Now things that they can do right, first, think of the mobilized spin that they did last year. They can continue to divest more of their stake in Mobileye. There could be other parts of the business.

Anything that is not x86 related, which is a CPU, or PC, or a server, anything that is not x86 with an Intel is always at the risk of divestment, because it's not something they produce in their own fab. So there could be other small parts of Intel that they could choose to divest and kind of keep the boat afloat for some time.

- So, Vivek, given all these things considered, does that make Intel stock right now untouchable?

VIVEK ARYA: We have a $25 price objective. As I mentioned, that the risks are a lot more than cyclical. I think they are structural risks-- right? --that the company is facing. Now what they can try and make go right is they can try and catch up in manufacturing. It's going to take another one or two years right for them. But that's a path that they are on.

It is possible that the PC market maybe recovers a lot more on the other side because the PC usage has definitely gone up versus the pre-covid levels. So there are things that could change at the margins more near-term. A China recovery could help them. So I think there is possibly a small jump off a low base. But for Intel to fly again, I think that's a very tough scenario to envision at this point.

- Vivek, before we let you go, who's your top pick in semiconductors? Obviously if Intel would be sort at the bottom of the barrel-- maybe for lack of a better term, --who would be at the top?

VIVEK ARYA: Yeah, I would say on the computing side, we have always maintained that good exposure to semis, you have to look at the three C's of semis, as we call them, cloud, cars, CapEx. Cloud is Nvidia. It's very hard to beat them in AI. And everything we heard about OpenAI, I think they are the biggest beneficiary.

I think on the car side, names such as ON Semiconductor and XP, very interesting. And CapEx is all the semi-cap equipment companies, Applied Materials, KLA. I think they are going to be the beneficiaries of this race between Intel and TSMC and Samsung, stimulated by all the money that's going to come from US and EU chips tax. So cloud cars, CapEx, I think I think a good exposure to Semis involves all three of those things.

- Vivek Arya, the Senior Semiconductor Analyst over at Bank of America. Thanks so much for taking the time here to break down all things Intel with us this morning.