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Intel Stock Tumbles After Mixed Q3 Earnings, Near-Term Profit Margin Warning

Intel's plans to ramp-up its chip making capacity will clip near-term profit margins, the tech group warned late Thursday, sending shares sharply lower in pre-market trading.

Intel Corp.  (INTC) - Get Intel Corporation (INTC) Report shares slumped lower in pre-market trading after the group reported weaker-than-expected third quarter sales and said profit margins would narrow as it ramps-up new technology chipmaking.

Intel's adjusted bottom line for the September quarter, at $1.71 per share, topped Street forecasts but sales fell modestly shy of the consensus at $18.1 billion thanks in part to weakness in the computing group that offset gains in its data center division.

The group's 2022 forecast sees revenues in the region of $74 billion and capital expenditures between $25 billion and $28 billion as it builds out its new chip foundry business and transitions away from its reliance on Apple  (AAPL) - Get Apple Inc. (AAPL) Report, which launched a newly-updated version of its MacBook this week that included its own M1 semiconductors.

Looking into the near term, however, Intel said its newer, faster chips would be less profitable in the early phase of their release, adding that profit margins would fall to between 51% and 53% over the next three years. That's around 3 to 5 percentage points lower than the 2022 forecast of 56.2%.

Free cash flow, forecast for $13 billion this year, will fall below $5 billion in 2022.

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"We have a couple of years to work through, but this is going to be a great outcome," CEO Pat Gelsinger told investors on a conference call late Thursday. "We think all of our aggressive lean-ins right now are going to be handsomely rewarded in the marketplace, to our customers and to our shareholders over time."

Intel shares were marked 11% lower in early trading Friday to change hands at $48.88 each, a move that would wipe out nearly all of the stock's year-to-date gain.

"Intel provided an earlier look at the model as the company transitions to one that includes large investments needed to build out its foundry business," said BMO Capital Markets analyst Ambrish Srivastava, who lowered his price target on the group by $4, to $56 a share, following last night's earnings report. He carries an 'outperform' rating on the stock. 

"For 2022, capital expenditures are going up by a meaningful amount, and free cash flow is headed the other way," he added . "Gross margin is going lower in 2022 as the company accelerates its investments in the various nodes, and is expected to stay depressed for 2-3 years."