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The Ratings Game: Intel is optimistic about its second-half prospects, but Wall Street isn’t

Intel Corp.’s optimism is unwavering about a strong second half of the year in the face of concerns about the broader semiconductor market, and that is making Wall Street analysts nervous.

Intel
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-6.42%

shares fell more than 6 % Friday, and was the worst performing stock on the Dow Jones Industrial Average
DJIA,
-1.70%
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which was down nearly 2%, and the PHLX Semiconductor Index
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-3.11%
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which was off about 2.5%.

Intel doubled down on its full-year outlook for the year Thursday, even as expectations for the second quarter appeared light. Executives stood by their full-year forecast, however, a forecast that was considered bullish when it was announced in February and consequently was met with analyst skepticism, meaning the chip maker is under the gun to deliver a strong second half.

The Santa Clara, Calif.-based chip maker continues to expect 2022 earnings of about $3.60 a share for the year on revenue of about $76 billion. Even as analysts expressed concern, the reiterated outlook did cause some to hike their estimates. Wall Street, on average, forecasts earnings of $3.44 a share on revenue of $75.2 billion, up from as previous consensus of $3.37 a share on revenue of $74.88 billion.

Many on the Street voiced apprehension about that plan, given rising inflation, declining PC sales, a stronger dollar
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COVID lockdowns in China that are only worsening supply chain problems, and the heightened geopolitical risk from Russia’s invasion of Ukraine.

Read: Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

While Bernstein analyst Stacy Rasgon called the results for the quarter “decent,” he played the foil to Intel’s optimism, forecasting a lot of pain ahead for investors.

“The poor structural narrative, of course, remains with server share losses likely to get worse given the recent roadmap pushout, ballooning capex, compressing margins, and vanishing free cash flow,” Rasgon said. “All of these are at least known, but that doesn’t make them any more palatable either, and pain has likely only just begun as investors get to deal with a multi-year waiting game before they find out if success or failure is in the cards.”

Susquehanna Financial analyst Christopher Rolland, who has a neutral rating and a $52 price target, also did not share Intel’s optimism for the second half of the year.

“Overall, management reiterated their ’22 outlook, as they see revenue acceleration in 2H after they work through near-term inventory issues, and as they launch Sapphire Rapids (SR) as well,” Rolland said. “We think this is risky. First, we expect a cooling of commercial PC units as a ‘WFH hangover’ ensues.”

Read: The pandemic PC boom is over, but its legacy will live on

Evercore ISI analyst C.J. Muse, who has an in-line rating and a $50 price target, said he fears a turn for the worse ahead.

“As for our takeaways, PC weakness does not come as a surprise and quite frankly we expect this trend to continue into 2H22,” Muse said. “We are encouraged by positive commentary on Hyperscale, though this figure is no longer provided so difficult to fully appreciate. Elsewhere, it’s all about 5 shrinks in 4 years and we continue to take a wait and see approach – we certainly hope Intel can do it, but we just need more proof points to turn more positive.”

Jefferies analyst Mark Lipacis, who has a hold rating and a $48 price target, doesn’t really see Intel’s stock going anywhere for a while.

“We expect Intel to continue to lose share to AMD
AMD,
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Nvidia
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and Ampere in the data center, as well as to its own customers Amazon in the data center and Apple in PCs,” Lipacis said. “With zero [free cash flow] expected for the next 3 years, we think upside potential for the stock is capped.”

Intel also started reporting results under a new operating structure that many analysts noted made comparisons difficult given that not everyone on the Street had shifted over.

Back in June, Intel Chief Executive Pat Gelsinger had announced the company was splitting its “Data Platform Group” into two new units the “Datacenter and AI Group,” or DCAI, and the “Network and Edge Group,” or NEX, which combined the network business with Intel’s Internet-of-Things and connectivity groups. So, while Intel reported sales of $6 billion from DCAI and $2.2 billion from DEX , analysts polled by FactSet had forecast $6.78 billion from the “Data Center Group” and $1.01 billion from IoT.

“Note that the company is using their new reporting structure, resulting in some messiness when attempting to compare segment results to consensus given the Street had not broadly made the shift yet; vs our estimates however (which had incorporated the change) client came in a bit above, and datacenter a bit below,” said Rasgon, who rates Intel’s stock as an “underperform” with a $40 price target.

Read: The end of one-chip wonders: Why Nvidia, Intel and AMD’s valuations have experienced massive upheaval

Of the 40 analysts who cover Intel, nine have a buy rating on the stock, 22 have a hold rating, and nine have a sell rating. Of those, 14 lowered their price targets on the stock, resulting in an average target price of $51.21, down from a previous $52.15, according to FactSet data.

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