Computer processor maker Intel (NASDAQ:INTC) beat analysts' expectations in Q4 FY2023, with revenue up 9.7% year on year to $15.41 billion. On the other hand, next quarter's revenue guidance of $12.7 billion was less impressive, coming in 10.3% below analysts' estimates. It made a non-GAAP profit of $0.54 per share, improving from its profit of $0.10 per share in the same quarter last year.
Intel (INTC) Q4 FY2023 Highlights:
- Market Capitalization: $207 billion
- Revenue: $15.41 billion vs analyst estimates of $15.17 billion (1.5% beat)
- EPS (non-GAAP): $0.54 vs analyst estimates of $0.45 (20.3% beat)
- Revenue Guidance for Q1 2024 is $12.7 billion at the midpoint, below analyst estimates of $14.16 billion
- EPS (non-GAAP) Guidance for Q1 2024 is $0.13 per share at the midpoint, below analyst estimates of $0.32
- Free Cash Flow was -$1.31 billion, down from $943 million in the previous quarter
- Inventory Days Outstanding: 121, down from 128 in the previous quarter
- Gross Margin (GAAP): 45.7%, up from 39.2% in the same quarter last year
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is the leading manufacturer of computer processors and graphics chips.
Founded in 1970 by Gordon Moore, Robert Noyce, and Andy Grove, Intel’s first business was actually focused on building memory chips,dynamic random-access memory (DRAM). The company had a near monopoly in the late 1970s, before Japanese competitors crushed Intel on pricing, prompting one the great pivots in tech history when it switched its focus to computer processors and was selected by IBM to provide the processor for the first PC in 1981. Intel’s x86 processor architecture subsequently became the industry standard for PCs, transforming the company into the dominant provider of chips used in PCs and data centers for decades.
Once revered for both its R&D and manufacturing prowess, Intel failed to diversify into growing end markets such as smartphones, 4G/LTE, and GPUs because it didn’t want to get into these (at the time) smaller and less profitable end markets - especially when it had a near monopoly in the highly profitable CPU business.
Over the past decade, Intel’s manufacturing edge first stagnated, and today trails rivals TSMC and Samsung, reducing its pricing power and margins. Intel faces ongoing challenges as its former x86 strongholds in PCs and datacenters are threatened by GPUs and ARM-based alternatives.Intel's primary competitors are Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), and Qualcomm (NASDAQ:QCOM).
Processors and Graphics Chips
Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models.
Intel's revenue has been declining over the last three years, dropping by 10.3% on average per year. As you can see below, this was a weaker quarter for the company, with revenue growing from $14.04 billion in the same quarter last year to $15.41 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
While Intel beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 9.7% year on year. Intel's growth, however, flipped from negative to positive this quarter. This encouraging sign will likely be welcomed by shareholders.
Intel returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 8.4% year-on-year growth next quarter, and analysts seem to agree, forecasting 13% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Intel's DIO came in at 121, which is 10 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Intel's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 45.7% in Q4, up 6.6 percentage points year on year.
Intel's gross margins have been trending down over the last 12 months, averaging 39.6%. This weakness isn't great as Intel's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Intel reported an operating margin of 16.7% in Q4, up 12.5 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Intel's operating margins have been trending up over the last year, averaging 7.8%. This is a welcome development for Intel, whose cost structure isn't as efficient as it could be, as indicated by its slightly below-average margins.
Earnings, Cash & Competitive Moat
Analysts covering Intel expect earnings per share to grow 286% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Intel's free cash flow came in at negative $1.31 billion in Q4, down 143% year on year.
As you can see above, Intel failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Key Takeaways from Intel's Q4 Results
Although Intel, which has a market capitalization of $137 billion, has been burning cash over the last 12 months, its more than $25 billion in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We were impressed by Intel's revenue and EPS beats vs. analyst expectations this quarter. Gross margin improved year on year and beat expectations as well. However, revenue and EPS guidance for Q1'24 were both well below expectations, causing the stock to drop 4.7% to $47.20 per share.
Return on Invested Capital (ROIC)
EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).
Understanding a company’s long-term ROIC (return on invested capital) gives another level of insight because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also its management team's decision-making prowess (because they're the individuals dictating what the company invests in).
Intel's five-year average ROIC was 12.7%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives. The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Intel's ROIC has averaged 19.6 percentage point decreases each year. This is yet another strike against the company and suggests its profitable investment opportunities are even fewer than in the past.
Key Takeaways from Intel's Q4 Results
We were impressed by Intel's strong gross margin improvement this quarter. We were also excited its EPS outperformed Wall Street's estimates. However, its revenue guidance for next quarter missed analysts' expectations. Overall, we think this was a strong quarter that should satisfy shareholders. Investors were likely expecting more, however, and the stock is down 5.7% after reporting, trading at $46.79 per share.
Is Now The Time?
Intel may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Intel, we'll be cheering from the sidelines. Its revenue growth has been poor over the last three years, and analysts expect growth to deteriorate from here. On top of that, its growth is coming at a cost of significant cash burn, and its operating margins reveal subpar cost controls compared to other semiconductor businesses.
Intel's price-to-earnings ratio based on the next 12 months is 26.7x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
Wall Street analysts covering the company had a one-year price target of $44.5 per share right before these results (compared to the current share price of $46.79), implying they didn't see much short-term potential in the Intel.
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