Intel Corporation Beats Estimates But Stock Falls: Here’s Why

Intel Corporation Beats Estimates But Stock Falls: Here’s Why

Intel shares slid starting in after-hours trades last night even though the company beat earnings estimates. The problem was weak guidance and the fact that management again lowered their outlook for the Data Center Group, which has been the center of the company’s restructuring efforts. Intel has been looking to data centers as a key part of its core going forward.

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Intel deals with weak Broadwell yields

While Intel received a number of price target cuts following last night’s report, Deutsche Bank analysts maintained their target of $40 per share and reiterated their Outperform rating. Intel beat earnings estimates by 8 cents per share, although it guided 4 cents per share lower than what analysts wanted to see for the fourth quarter. Additionally, management again cut their full-year guidance for growth in the Data Center Group, this time from the “double-digits” to the “high-single digits.”

Apparently Intel is facing continued declines in its core enterprise business, which makes up about 40% of Data Center Group sales. Deutsche Bank analyst John Pitzer also explained in a report following last night’s earnings release that the chip maker is experiencing an artificial depression in the segment’s profitability due to poor initial yields for its Broadwell processors and incremental investments. As a result of the low yield problems, the company recorded 10% sales growth in data centers while DCG OpInc fell 1%.

Pitzer also described himself as being “underwhelmed” by Intel’s restructuring efforts because thus far, the incremental investments associated by the restructuring have been greater than the incremental savings. Further, the product mix is shifting from the new supposed core data center business toward the Client Computing Group, which he notes will not help multiple expansion. Investors don’t want to see dependence on the shrinking PC market.

Intel price target cut by Pacific Crest, RBC

Intel received a long list of price target cuts following last night’s earnings release, and despite Pitzer’s decision to keep his Outperform rating and $40 price target, even he came across sounding bearish. RBC Capital analyst Amit Daryanani reiterated his Sector Perform rating but cut his price target for the chip maker by $1 to $37.

While Pitzer is not thrilled with the restructuring thus far because of the lack of major cost cuts, Daranani expects most of those reductions to come in the first half of next year. Despite management’s reduced outlook for data center growth, he still sees growth in the double digits, but he doesn’t see a 15% growth rate as possible unless the company stabilizes its enterprise business.

Also Goldman Sachs analysts trimmed their target from $39 to $36 per share, while Bernstein moved from $35 to $33. Canaccord Genuity remains bullish on Intel but trimmed its target from $44 to $43 per share. Also UBS analyst Stephen Chin cut his target to $40 to $43 while reiterating his Buy rating, while Pacific Crest cut its price target from $44 to $41 per share.

Shares of Intel stock tumbled by as much as 6.01% to $35.48 during regular trading hours on Wednesday.

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