Looking at chip makers?
Intel's data center outlook is likely worse than many currently think, Alliance Bernstein analyst Stacy Rasgon wrote in a note. Plus, gross margins look to be clearly worsening, while Wall Street hasn't yet priced that in.
Data Center Weakness
"Datacenter expectations in the second half consensus appear very aggressive," Rasgon wrote. Data center revenue represents roughly 31% of Intel's total revenue, and macro economic weakness in China has pressured data center spending.
Meanwhile, Rasgon's research shows cloud capital expenditures are slowing, which could indicate the same for data center spending. Cloud capex from heavy software hitters like Amazon (AMZN) - Get Report and Microsoft (MSFT) - Get Report among other big players was roughly $22.5 billion in the fourth quarter of 2018. That came in at around $18 billion in the first quarter of 2019. Analysts are already looking for a 6.8% decline in data center revenue for Intel for 2019, according to FactSet.
"A more important question is what may be to come particularly around gross margins (with the Street not yet incorporating the company's analyst-day guidance, and with out-year numbers likely far too high as a result), Rasgon said. "Hence we believe forward numbers likely need a material reset as that structural margin compression gets incorporated, with gross margin degradation likely to materialize in short order"
Analysts are looking for a 2019 gross margin of about 59%, but Rasgon told TheStreet that Intel indicated to investors it will start recording higher depreciation of assets during the year.
Remember Last Quarter?
It was't fun for Intel investors. When reporting earnings in April, Intel dropped its revenue guidance for the rest of 2019 to $69 billion from $71 billion, as data center weakness in China was to take hold. Many analysts dropped their price targets because of the perceived data center weakness. The stock fell from $58 to $43.46, a 2019 low, after the earnings report.
Now, the stock is up 17% from that 2019 low, and if there's anything to Rasgon's point of view, Intel investors should be careful.