Track Hyper | Intel in turmoil: Some are getting anxious!

Intel is facing a tumultuous autumn.

News from the market and Intel itself is mixed; fortunately, the stock price did not react excessively. On the day Intel released its third-quarter financial report, November 1, its stock price rose significantly by 7.81% to $23.20.

Intel's third-quarter financial report for 2024 (for the period ending September 28, 2024), released on November 1, showed a dismal performance: for instance, net profit plummeted by as much as 6064.76% year-on-year, resulting in a loss of $16.64 billion, which even alarmed the U.S. government.

Caring Efforts, Praiseworthy

Market news suggests that the U.S. government, concerned about Intel's financial issues, is exploring ways to extend Intel's viability; one option is to merge Intel's chip design business with competitors like AMD or Marvell. On November 6, Wall Street Journal indirectly confirmed through sources close to Intel that this effort by the U.S. government indeed exists.

This effort by the U.S. government appears to be quite protective, as there have not yet been any concrete actions taken, remaining in the realm of defensive preliminary discussions. This is similar to previous reports suggesting selling Intel to Qualcomm, which is also true but still in the early discussion phase, far from actual implementation.

The U.S. government seems very concerned about whether Intel can maintain its technological influence in the market, which is why it promised early on (in 2022) to include Intel in the federal CHIPS Act subsidy program, committing to provide substantial financial support, including $8.5 billion in subsidies, $11 billion in low-interest loans, and potential tax reductions of up to $25 billion in the future.

However, to date, Intel has complained that it has not benefited from this act. Intel CEO Pat Gelsinger publicly expressed his frustration with the U.S. CHIPS Act, as the Biden administration has delayed the disbursement of the promised "emergency funds."

Of course, the U.S. government would have its own demands for such a large scale of support, such as requiring Intel to provide necessary financial information and a detailed plan on how to utilize the funds. But they have not received this, as Intel is unwilling to comply.

Currently, Intel is still striving to secure these funds. An Intel spokesperson stated in a statement, "We have developed and executed a clear strategy, and we will demonstrate that our plans have made significant progress with the strong operational performance delivered in the third quarter."

This so-called significant progress, as seen in the third-quarter financial report released on November 1, shows that Intel, as a business giant, is already living a lie.

Because net profit appears to have collapsed, and the fundamentals (client + data center) have also been lost—data center revenue has been surpassed by AMD for the first time in over 20 years, while client business fell below market expectations, showing a year-on-year decline of 6.8%, whereas AMD saw a substantial year-on-year growth of 29.5%; in terms of AI, Intel still has not achieved significant growth But things are actually okay and not too serious.

How to say this?

It's okay, not that bad

If you take a closer look at Intel's third-quarter report, it's not hard to find that the main reason for the significant decline in net profit in the third quarter was that Intel made a substantial provision during the quarter: a total of $3.1 billion in impairment charges for manufacturing assets—mainly related to non-cash impairment or accelerated depreciation expenses for Intel 7, which were recorded as a one-time provision and included in the cost items.

If we exclude the impact of this provision, Intel's gross profit in the third quarter was actually about $5.1 billion, corresponding to a gross margin of 38.4%, which is slightly higher than market expectations (36.5%).

What is the impact of this one-time provision? It dragged down Intel's gross margin performance in the third quarter, with a gross margin of only 15%, a quarter-on-quarter decline of 20.4%; this naturally also affected gross profit performance, with Intel achieving a gross profit of $1.997 billion in the quarter, a year-on-year decline of 66.8% (mainly contributed by the PC client business).

However, the impact on revenue for the quarter was not very significant: Intel achieved revenue of $13.284 billion in the third quarter, a year-on-year decrease of 6.2%, slightly better than market expectations ($13.025 billion).

In addition, Intel also made several provisions for impairment expenses related to manufacturing assets, restructuring expenses, goodwill and intangible asset valuation reserves, and deferred tax asset valuation reserves, totaling $18.5 billion, which dragged down Intel's net profit performance in the third quarter.

If we exclude the impact of these expense provisions, Intel's net profit for the quarter was actually only a loss of $140 million, far less shocking than the reported loss of $16.64 billion.

From the perspective of actual business segments, Intel's business structure currently consists of client business, data center and AI, networking and edge domains, Mobileye, and foundry services.

Among them, client business and data center and AI business are Intel's largest sources of revenue, together accounting for over 80%.

In the first quarter of 2024, Intel adjusted its business structure, separating Altera from data center and AI; additionally, it changed the revenue from foundry services (IFS) to wafer foundry revenue and internal business offsets.

The main reason for the overall revenue decline in the third quarter was actually due to a year-on-year decline of 6.8% in client revenue ($7.33 billion, below the market expectation of $7.46 billion).

In terms of AI, based on the financial report data, Intel still has not been able to gain entry qualifications. After excluding Altera's business, the revenue from data center and AI business still achieved a year-on-year increase of 9%, mainly due to a rebound in traditional server demand in the third quarter; however, Altera's revenue declined by as much as 44% year-on-year (the good news is that it increased by 14% quarter-on-quarter), indicating that Intel's AI business has yet to emerge from difficulties.

Due to the decline in Intel's core market share, the lack of progress in AI business, and a significant reduction in market value (shrinking from $290 billion in 2020 to around $100 billion), S&P Dow Jones Indices removed Intel from the Dow Jones Industrial Average in early November, causing Intel to lose its status as a component of the Dow after 25 years From the actual performance of the third quarterly report, after the completion of expense provisions, Intel is at least financially healthy and can move forward with ease. The so-called "after hardship comes happiness," if Intel can receive technology subsidies from the U.S. government in the future, then Intel's future is relatively optimistic