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Don’t Get Too Excited About Intel’s Guidance— The Short-Seller’s Case on the Stock

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Intel cleared revenue and earnings expectations easily and posted strong guidance for 2020, bringing the stock significantly higher. But the guidance was heavily weighted towards the first quarter, spelling potential trouble ahead.

The stock rose 8.19% to $68.50 a share Friday.

Thursday, Earnings per share for the December quarter grew 19% year-over-year to an adjusted $1.52, beating Wall Street estimates of $1.25. Revenue rose 8% to $20.2 billion, beating analysts expectations of $19.23 billion. Gross margin rose to 60.1%, beating estimates of 58%.

Intel has ridden the wave of an industry-wide pricing and revenue rebound, which continued to show up in data center revenue results for Intel. Data center revenue grew 19%, "driven by robust demand from cloud service provider customers,” the company said.

Management guided for full year 2020 revenue of $73.5 billion, better than analysts estimates of $72.4 billion. The company is looking for adjusted EPS of $5 for the year on an operating margin of 33%, against Wall street's expectation of $4.66 and a margin of 31.9%. Intel expects capital expenditures to be $17 billion, an uptick over 2019's $16 billion and higher than Street forecasts. Free cash flow is guided for $16.5 billion, better than analyst expectations of $16.1 billion.

But first quarter revenue and earnings are expected to take the majority of the strength in the year. Management guided for Q1 revenue of $19 billion and EPS of $1.30, leaving the average revenue and EPS number for each of the last 3 quarters at $18 billion and $1.23, lower than Q1’s expected results.

“The entirety of the upside appears confined to Q1, with the rest of the year guided down year-over-year,” Alliance Bernstein analyst Stacy Rasgon wrote in note, adding that PC demand is looking to slow as the year progresses.

“We have seen the Intel short case as building into the second half as structural headwinds (PC tailwinds ebbing, gross margin degradation, competition, etc.) build,” Rasgon said. “And in fact, Intel’s commentary acknowledges all of these impacting fundamentals later this year, during which time the plan to ramp capacity, to rebuild inventories, into a market entering decline (seemingly dangerous).”

Simply put, Intel is ramping up investment in a year that indicates the possibility of what Rasgon sees as a questionable trajectory into 2021.

Benchmark Capital analyst Ruben Roy also pointed out what Rasgon did. “Strong start expected in 2020, but a more tempered second half outlook.” While Roy said Intel’s second half 2020 estimates may merely be “conservative,” he flagged PC pricing and volume headwinds as potentially coming to fruition.

Meanwhile, Intel is trading at roughly 13 times 2020 EPS, above the company’s historical average of 12. Prior to the earnings, analysts saw 2021 EPS of $5.01, virtually flat over Intel’s 2020 guidance. The 2021 estimate may move slightly higher, but the upside on the stock may begin to look limited. 

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