Intel: Strong performance but surge in expenses, foundry business outlook relies on external verification, maintain neutral (Morgan Stanley)
Intel's second-quarter non-GAAP revenue was US$16.128 billion and EPS was US$0.43, significantly exceeding expectations.
Intel's second-quarter non-GAAP revenue was US$16.128 billion and EPS was US$0.43, significantly exceeding expectations. Based on strong confidence in the long-term foundry and packaging prospects, management increased capital expenditures to approximately US$20 billion and US$30 billion. Higher spending is expected to turn free cash flow into negative territory, and foundry success relies on new entrants to the industry rather than an internal shift in the company's culture. The report believes that until there is no evidence of de-risking the foundry relationship and restoring server performance leadership, it is highlights to remain on the sidelines. One-sentence conclusion: Intel's strong quarterly results were offset by surging capex plans, the grand narrative of its foundry business needs external customer success to prove, the risks currently far outweigh the opportunities, and the stock price lacks a clear upward driver. Positive/negative: Neutral to negative for Intel (INTC.US). The market has reacted positively to the better-than-expected performance, but has not fully priced in the deterioration of future free cash flow and uncertainty in the foundry business. Catalyst: Intel Foundry Services (IFS) obtains public commitment from any large external customer (e.g. NVIDIA, AMD). Mass production progress of advanced processes and packaging technologies such as 14A and EMIB-T. Can server CPU market share data prevent AMD's continued erosion?