Intel server chip woes a drag on sales forecast; shares fall

Bloomberg

Intel Corp Chief Executive Officer Pat Gelsinger said the worst of a sales slump has passed and struck a bullish tone about the chipmaker’s prospects for the rest of the year and beyond. Investors are waiting to see proof that the company can regain dominance in semiconductor industry.
The key to winning them over will be Gelsinger’s ability to lure back some of the largest companies in technology — cloud giants like Amazon.com Inc. and Alphabet Inc.’s Google — whose purchases of server chips for data centers have been a main engine of Intel’s profit and growth.
While demand for Intel’s server processors — its most lucrative business — picked up in the second quarter from the first, investors fretted that the division’s 9% year-over-year decline in sales may signal a long road to recovery. Intel’s Xeon chips, some of which sell for as much as a compact car, compete for business with souped-up offerings from Advanced Micro Devices Inc., and increasingly from the internal chip-design efforts of major cloud customers, who are keen to supply their own parts.
Sales to those cloud providers like Amazon’s AWS and Google dropped 20% in the recent
period, Intel said in its second-quarter earnings report. Gelsinger projected double digit-percentage sales increases for the data center business as a whole in the second half of the year, and said he expects pricing and market share to remain stable. Still, prices dropped in the June quarter because of competitive pressure, and the unit won’t match its revenue total for 2019 this year, he said.
The performance of the data center unit, known internally as DCG, is a bellwether for the progress of Gelsinger’s drive to restore Intel to leadership of the industry. Gelsinger, 60, who took the helm in February, has pledged to restore Intel’s technological leadership in the semiconductor industry, following a spate of production issues that delayed some of its most advanced chips. He has outlined plans to spend heavily to expand its reach in manufacturing to pose a stronger challenge to Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co.
The company said sales in the current period will be about $18.2 billion, compared with an average analyst projection of $18.3 billion. Shares dropped 5.5% at 11:55 a.m. in New York on Friday, paring their gain for the year to 6%.
In the second quarter, the company’s personal computer business slightly topped estimates, helping boost overall sales. Santa Clara, California-based Intel said sales in the period climbed 2% to $18.5 billion, exceeding average predictions for revenue of $17.8 billion. Annual sales for 2021 will exceed the company’s previous target, Intel projected.
Those numbers weren’t enough to raise optimism about Intel’s lukewarm performance against the backdrop of strong demand for semiconductors in general and widespread industry shortages, according to Edward Jones analyst Logan Purk. Investors want companies to set more ambitious targets, he said. They’re also concerned that Intel is never getting back to the 99%-plus share of the server chip market it once commanded, and will remain too dependent on PCs.
“I think it boils down to PC sales driving a bulk of outperformance, which likely reverses soon,” Purk said. In data centers, he said, “it will decline over time and these hyperscalers will begin to supply themselves.”