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Earnings Special: Intel Plunges on PC Sales Slump & Amazon Slips · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts. Radio.
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  Speaker 3: News.
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  Speaker 4: This is a breaking news update from Bloomberg.
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  Speaker 5: Instant reaction and analysis from our 3,000 journalists and analysts
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  Speaker 5: around the world. Shares of her Intel down more than 20%
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  Speaker 5: right now. This after its revenue forecast missed analyst estimates.
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  Speaker 5: It was hurt by sputtering demand for PC processors and
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  Speaker 5: supply chain problems with its lucrative data center components. I
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  Speaker 5: want to bring in Kunjan Sabani, Senior Semiconductor Analyst for
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  Speaker 5: Bloomberg Intelligence. Kunjan, this stock was up 150% going into
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  Speaker 5: today's print, but still a 20% haircut is a big
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  Speaker 5: haircut no matter which way you look at it. What's
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  Speaker 5: your take on this print?
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  Speaker 3: Yeah, I mean, look, the massive misses on the 4Q
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  Speaker 3: guide is just very surprising. We all knew that the
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  Speaker 3: PC market is not looking that strong, but the results
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  Speaker 3: that came in are, again, surprising. At least from what
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  Speaker 3: we have seen so far, it looks to me that,
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  Speaker 3: you know, the data center, which was upbeat, is looking strong,
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  Speaker 3: but they cannot get enough supply there to sell more
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  Speaker 3: into the data center. And the headwinds from the PC
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  Speaker 3: are large enough that whatever they are able to get
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  Speaker 3: more supply on the data center side and get a bead,
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  Speaker 3: it's not large enough to offset. One more key important
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  Speaker 3: point here is that gross margin miss. That's very substantial.
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  Speaker 3: We finally had Intel getting to sort of the mid
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  Speaker 3: 40s after a few quarters of really good work. And
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  Speaker 3: so we are back down again with almost 600 plus
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  Speaker 3: basis point of a decline quarter over quarter.
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  Speaker 4: That's substantial.
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  Speaker 3: We think that's again coming from Intel trying to get
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  Speaker 3: more supply and push more on the data center side.
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  Speaker 4: Which is where the future is. But that comes at
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  Speaker 4: the cost of.
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  Speaker 3: Lower margins, loading up the factories on the new nodes,
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  Speaker 3: which are, again, a headwind to the margins. And the
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  Speaker 3: PC business, which is a better margin business, not doing
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  Speaker 3: so well. So the mix of combinations between data center
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  Speaker 3: and PC is not helping Intel.
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  Speaker 1: Yeah, Kunjan, you know, what's interesting, too, is, you know,
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  Speaker 1: is it a case of that if they could get
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  Speaker 1: all the supply they needed in order to meet demand,
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  Speaker 1: we would be having a very different conversation today? Or
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  Speaker 1: is it more than that because of what we're seeing
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  Speaker 1: on the PC side?
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  Speaker 3: If they were able to get more demand on the
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  Speaker 3: data center side, on the revenue line item, we would
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  Speaker 3: not see such a big deviation. It would still be
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  Speaker 3: able to offset the weak demand in PC. But I
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  Speaker 3: think we would still have seen some headwinds on gross margin. Remember,
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  Speaker 3: data center products, the more they ship right now, it's
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  Speaker 3: a headwind for gross margin because it's a lower gross margin.
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  Speaker 3: They are loading it all up on the newer nodes,
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  Speaker 3: which are much more expensive until you reach a certain point.
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  Speaker 4: Where it starts being more profitable.
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  Speaker 3: So we would have seen less of an impact on
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  Speaker 3: the top line, but still an impact on the gross margins.
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  Speaker 1: You know, it's interesting. We had a conversation earlier with
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  Speaker 1: one of our guests here at Schwab Impact in Boston.
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  Speaker 1: And this kind of concept of, you know, you kind
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  Speaker 1: of have to invest for the future so that if
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  Speaker 1: you look at a company like Alphabet, which just got
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  Speaker 1: creamed today in today's session, if you think about the
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  Speaker 1: market cap drop that it endured, that this whole idea
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  Speaker 1: that you're investing in the future of Alphabet. and if
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  Speaker 1: you believe in the course and the impact of AI.
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  Speaker 1: And I do wonder about Intel. Have they righted the ship,
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  Speaker 1: made the changes they need for an Intel of the future,
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  Speaker 1: and that investors need to be patient here?
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  Speaker 3: I think investors do need to be patient, and they
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  Speaker 3: have been patient. Look, they are investing here for the future.
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  Speaker 3: Investing to bring up capacity in the data center and
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  Speaker 3: focusing on the data center is the right choice because
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  Speaker 3: that is the better, faster growing end market in the future.
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  Speaker 3: And the North Star for Intel, again, remains that foundry business.
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  Speaker 3: which they've done a lot of progress on. But you look,
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  Speaker 3: you are in an environment where every single one of
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  Speaker 3: your peers is beating by billions of dollars. You know,
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  Speaker 3: they are guiding up their revenues multiple times in a
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  Speaker 3: year just for future years. Folks are giving guidance more
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  Speaker 3: than two years out when it comes to your semi peers.
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  Speaker 4: So there's also that peer pressure, right?
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  Speaker 3: So for investors, when they're looking at other semi companies,
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  Speaker 3: which are giving such robust results, both in near-term and
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  Speaker 3: outward guidance. It's just difficult to stay patient when you
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  Speaker 3: see such hiccups.
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  Speaker 2: On the way.
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  Speaker 1: All right, so top question that you think has to
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  Speaker 1: be asked on this call with analysts and investors from
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  Speaker 1: the Intel C-suite.
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  Speaker 4: I think two questions, right?
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  Speaker 3: When do we really expect sort of the gross margin
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  Speaker 3: trajectory to really find a floor? We have seen this
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  Speaker 3: repeat a couple of times where we see positive progress
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  Speaker 3: on gross margin and suddenly we hit a quarter where
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  Speaker 3: We sort of take one step forward and two steps back.
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  Speaker 3: And I think the second question remains, how is the
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  Speaker 3: progress going on the Foundry side? We have seen a
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  Speaker 3: lot of announcements, positive announcements around packaging, and their packaging technology.
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  Speaker 4: Is really differentiated.
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  Speaker 3: We really want to start seeing significant material revenues come
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  Speaker 3: out of that business.
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  Speaker 1: Is there any other semiconductor name that we should be
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  Speaker 1: watching as a result of what we're seeing from Intel?
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  Speaker 1: Just real quickly.
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  Speaker 4: Yeah, next week, AMD.
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  Speaker 3: Again, AMD is also exposed to the similar PC head markets,
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  Speaker 3: but we don't think they will do much worse because
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  Speaker 3: of their exposure and share gains. But that's something we'll
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  Speaker 3: be watching carefully.
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  Speaker 1: All right. Going to leave it on that note. Kunjan Subani,
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  Speaker 1: he is Senior Semiconductor Analyst at Bloomberg Intelligence, joining us,
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  Speaker 1: of course, on Intel shares, continuing to trade lower in
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  Speaker 1: today's session, down about 18.5%.
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  Speaker 5: Hey, Amazon shares are lower in the after hours as well,
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  Speaker 5: down about 6.7%. Third quarter AWS net sales, excluding FX,
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  Speaker 5: did beat estimates. The company still sees year cash capex
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  Speaker 5: at about $ 220 billion. It sees fourth quarter net sales,
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  Speaker 5: $ 240 to $ 247 billion. That's in line with estimates at
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  Speaker 5: $ 244 billion and a half. Third quarter AWS net sales,
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  Speaker 5: excluding FX, was up above estimates at 39%. I want
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  Speaker 5: to bring in Anurag Rana, Senior Tech Analyst at Bloomberg Intelligence.
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  Speaker 5: He joins us from our Chicago bureau. Anurag, we just
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  Speaker 5: spoke to Kunjan about Intel, shares of Intel down, wow, close,
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  Speaker 5: you know, 20% at this point. Shares of Amazon are
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  Speaker 5: down lower in the after hours right now by 6.7%.
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  Speaker 5: Your takeaways from this print?
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  Speaker 2: Yeah, when you look at cloud results from both Google
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  Speaker 2: and Microsoft, we saw a big beat on the growth rate.
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  Speaker 2: I think in the case of Amazon, they just went
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  Speaker 2: ahead and met the expectations at 39%. So basically, you know,
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  Speaker 2: that is probably what's causing the shares to go down.
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  Speaker 2: But I'd also point out to one particular thing that
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  Speaker 2: they said. they're expecting AWS sales to be above 40%
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  Speaker 2: into 27 and 28. I think that's a very, very
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  Speaker 2: strong numbers given where we are in the cycle. So
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  Speaker 2: I think in my view, people are maybe disappointed that
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  Speaker 2: they didn't beat AWS by a big number. But from
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  Speaker 2: our side, I think we really like those 40% numbers.
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  Speaker 1: Yeah, it's interesting too. Amazon in total sees revenue growth
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  Speaker 1: rates of over 40% in 2027 and 2028. Free cash
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  Speaker 1: flow falling to an outflow of $ 42. 4 billion.
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  Speaker 2: Wow.
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  Speaker 4: Repeat that?
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  Speaker 1: And cash flow fell to an outflow of $ 42. 4 billion
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  Speaker 1: for 12 months, I guess, trailing. For trailing 12 months? Yeah.
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  Speaker 2: Wow.
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  Speaker 1: So, I mean.
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  Speaker 1: How do we make sense about the spend? You need
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  Speaker 1: the spend to be in it, right? These guys obviously
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  Speaker 1: have the money to do it, but they're increasingly tapping
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  Speaker 1: credit markets and debt markets, as we've often talked about.
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  Speaker 1: You guys still seem pretty upbeat.
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  Speaker 4: Yeah, but think about it this way.
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  Speaker 2: You have to invest that money because imagine the backlog
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  Speaker 2: that's on their balance sheets. And it's not as if
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  Speaker 2: they don't have really strong businesses that's driving revenue from
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  Speaker 2: them or cash flow from them from other side. I mean,
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  Speaker 2: this AWS, think about it this way, has operating margins
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  Speaker 2: close to 39%. That's a very good business to be in,
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  Speaker 2: frankly speaking. And once you gain some market share, you're
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  Speaker 2: going to go out and sell additional services, application modernization.
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  Speaker 2: I mean, we're just in this... start of this particular cycle.
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  Speaker 2: And I understand that cash flow is down this year.
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  Speaker 2: But frankly speaking, you look ahead, I mean, from the
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  Speaker 2: run rate of that they have for cloud, let's say
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  Speaker 2: about $ 180 billion, growing 40% each year. That's really commendable.
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  Speaker 1: Is there a narrative around all of them? I just
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  Speaker 1: think about what we've heard from Meta, from Microsoft, from Alphabet,
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  Speaker 1: from obviously Amazon today as well. I'm sure I'm leaving
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  Speaker 1: out one of them. But they're not all the same companies, Anurag.
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  Speaker 1: We know that. But is there a narrative around the
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  Speaker 1: AI spend and the payoff or no?
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  Speaker 2: It's not a question of payoff. I think what has
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  Speaker 2: changed in the last decade I would say six months
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  Speaker 2: or so are twofold. One is that interest rates have
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  Speaker 2: gone up quite a bit. I mean, you're looking at,
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  Speaker 2: you know, people's ability to fund these expansion plans.
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  Speaker 4: So that's one.
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  Speaker 2: The second is a changing political climate, which is seeing
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  Speaker 2: some opposition to data center buildup. So, you know, we
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  Speaker 2: all know the CapEx numbers right now. But what if
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  Speaker 2: the data center delivery becomes a delay? Then what happens
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  Speaker 2: is The cash flow is still negative, and your growth
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  Speaker 2: rate that you are projecting out doesn't realize because of
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  Speaker 2: factors that are not in your control. We saw Microsoft
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  Speaker 2: talk yesterday about there was a delay in data centers
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  Speaker 2: from one of their third parties. That's the first sign
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  Speaker 2: we have. What if something like this happens a lot
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  Speaker 2: next year because the political climate is extremely bad? negative
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  Speaker 2: towards new data center build?