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Intel Shares Plunge After Margin Pressures Offset Solid Q3 Earnings, 2020 Guidance

Intel said margin pressures, triggered by the sale of cheaper versions of its semiconductors to belt-tightening customers, would likely continue over the final three months of the year.

Intel Corp.  (INTC) - Get Intel Corporation Report shares plunged the most in three months Friday after the group said customer demand for its cheaper, lower-margin chips would likely eat into near-term profits.

Intel matched Street forecasts for sales and earnings after the close of trading Thursday, posting non-GAAP profits of $1.11 per share on revenues of $18.3 billion. However, data center and personal computer sales indicated that cheaper semiconductors put pressure on the group's gross margins, which were around 200 basis points below the company's prior guidance at 55%.

Intel boosted its full-year non-GAAP earnings guidance to $4.90 per share, a 5 cents per share improvement from its summer forecast, and sees fourth quarter revenues of around $17.4 billion.

"2020 has been the most challenging year in my career with a global pandemic geopolitical tensions challenging business principles of globalization and social unrest," CEO Bob Swan told investors on a conference call late Thursday. "Despite all this, we expect to deliver the best year in our storied 52-year history."

"We plan to grow revenue by $1.8 billion more than our January expectations even as COVID has significantly impacted our business mix," he added. "Full year gross margin will be down approximately two points versus our January expectation primarily driven by acceleration of 10-nanometer-based products and a change in mix of products in a work-from-home, study-from-home environment."

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"We've maintained spending discipline even as we invest in our workforce communities and supply chain to combat COVID and the decision we made to sell our NAND business will drive one to two points of non-GAAP gross margin accretion next year."

Intel shares were marked 11.3% lower in early trading Friday to change hands at $47.80 each, a move that extends the stock's six-month decline to around 19%. 

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"Following the revelation of a 7nm delay last quarter, Intel posted gross margins 200 basis points below guidance and indicated gross margins would stay low in 4Q, giving bears plenty to focus on," said KeyBanc Capital Markets analyst Weston Twigg, who carries and 'overweight' rating with an $82 price tag on the stock.

"We're less alarmed (GM is low on mix and should improve in 2021), and we would be buyers on any selloff," he added. "Intel remains very well positioned to benefit from the expansion of compute markets and it has a compelling product pipeline, which should drive a positive shift in narrative."