Intel (INTC.US)'s bright earnings report earned “poor expectations”, but Wall Street is still worried about OEM losses and “AI valuation kill”

The Zhitong Finance App learned that as global demand for semiconductors and computing power continues to evolve, chip giant Intel (INTC.US) handed over a second-quarter financial report that far exceeded low market expectations. Benefiting from the strongest year-on-year growth rate in the data center and artificial intelligence business (DCAI) in nearly 15 years and third-quarter guidance that exceeded expectations, Intel's pre-market stock price rose by about 3% on Friday. However, behind this apparently “hugely successful” performance questionnaire, analysts from Seeking Alpha and several Wall Street investment banks pointed out that the decline in market expectations was the main reason for the positive reaction in stock prices. Intel's core foundry business (IFS) is still facing huge losses. Coupled with the tens of billion dollars in market value (MTM) accounting adjustments surrounding the CHIPS Act (CHIPS Act), Intel's transformation path is still intertwined with valuation disputes and structural pain.

Core data: The strongest growth rate in 15 years, exceeding expectations eight times in a row

This is the eighth time in a row since the third quarter of 2024 that Intel has surpassed expectations. Under the non-GAAP scale, the gross profit margin was 41.8%, a significant increase of 12.1 percentage points compared to 29.7% in the same period last year. The Q3 guidance is also strong: estimated revenue of $15.8 billion to $16.8 billion, with a median value of $16.3 billion far exceeding analysts' expectations of $15.1 billion; non-GAAP EPS guidance of $0.38, higher than the forecast of $0.27.

However, under GAAP, Intel recorded a net loss of 11 billion US dollars, with a loss of 2.16 US dollars per share. This huge loss stemmed from $12.5 billion in non-cash expenses of escrow shares in connection with the US CHIPS Act Secure Enclave arrangement at market value. The higher the Intel stock price and the greater the value of the escrow shares held by the government, the more unsightly GAAP loss figures — but this cost does not affect the company's actual cash flow and main business performance.

Data Centers and AI: The “Return of the King” of CPUs

The brightest star of Intel's Q2 earnings report is the Data Center and AI Division (DCAI): revenue of US$6.3 billion, surging 59% year over year, far exceeding analysts' expectations of US$5.6 billion. CEO Chen Liwu said bluntly during the performance call: “In the data center sector, CPU demand is taking off, and demand is exceeding our growing supply capacity.”

The root cause of this explosion in CPU demand is that the AI industry is moving from “training” to “reasoning,” and from “centralized” to “distributed.” After several years of GPUs dominating AI computing, the value of CPUs in AI agent (Agentic AI) execution tasks has been rediscovered. Autonomous AI agents require extensive general computing power to complete inference, scheduling, and coordination tasks, which is the strength of x86 CPUs.

OEM business: losses have narrowed, and the first external customer has surfaced

The Q2 revenue of Intel Foundry (Intel Foundry), which is seen as a key location for Intel's transformation, was US$5.8 billion, up 31% year over year. The operating loss was 2.1 billion US dollars, but thanks to the higher yield rate of Intel's 18A advanced manufacturing process than expected and production capacity expansion, the loss amount has narrowed month-on-month.

In terms of technological progress, Chen Liwu revealed that the current output of the 18A process has exceeded expectations by 25%, with a month-on-month increase of more than 50%, and the yield improvement trend is good. The key indicators of the more advanced 14A process are superior to internal targets, and risk mass production is scheduled to begin in the second half of 2027. More importantly, Intel revealed its first publicly named external foundry customer — cybersecurity vendor Fortinet.

Client business: AI PCs account for two-thirds

The Client Computing and Physics AI Division (CCPG)'s Q2 revenue was $8.9 billion, up 13% year over year. Among them, AI PC revenue increased 26% month-on-month, accounting for two-thirds of client revenue. The PC business is changing from a “stock market” to an “AI upgrade market,” and Intel's first-mover advantage in this field is being transformed into real revenue growth.

Capital expenditure: $20 billion is just the beginning

Facing surging demand for AI computing power, Intel is expanding production capacity at an unprecedented rate. The company announced that it will raise its capital expenditure forecast for the full year of 2026 to more than 20 billion US dollars, and predicts that the capital expenditure in 2027 will be significantly higher than the 2026 level, and the vast majority will be invested in the US manufacturing network.

CFO Zinsner revealed that Intel's total capital expenditure on US tools and factory space will be close to $100 billion from 2021 to 2026. The investment will be used to procure equipment, accelerate clean room construction, and lock in the supply of substrates and memory to support the dual growth demand for OEM and proprietary products.

Wall Street Perspectives: “Valuation Anxiety” Amid Long and Short Divergences

Seeking Alpha analyst The Techie said, “As early as June, I downgraded Intel's rating to 'sell', after Nvidia (NVDA.US) successfully entered the consumer PC processor market with the RTX Spark superchip. Part of the reason I sold it at the time was that the stock was overvalued. Since then, I've seen a correction in the stock price, falling by about 26% in the past month alone. I think this has led to a general decline in market expectations, making this financial report look very good. The results are certainly good, but I've seen some better performing companies experience falling stock prices this quarter. I think the market is always looking for good news to digest this financial report because despite the company's month-on-month decline and weak profit margin growth, its performance guidance is still better than expected.”

Seeking Alpha analyst Louis Gerard said, “Intel just announced a relatively strong quarter, with revenue reaching $161 billion, up 25% year over year, and about 12% higher than expected. Non-GAAP earnings of 42 cents per share were nearly double expectations, mainly due to strong 59% growth in the Data Center and Artificial Intelligence Group (DCAI). ”

However, analysts pointed out, “The foundry business is still underperforming. Although its revenue reached US$5.77 billion, an increase of 31% over the previous year, it still recorded an operating loss of US$2.09 billion. Coupled with interdepartmental offsets, losses reached US$5.48 billion, so external foundry revenue was only US$300 million. To be fair, Intel's entire bullish logic was based on 18A external funding drive, which was not reflected in earnings.”

Gerard added that the $11 billion GAAP loss was not an impairment, but rather a custodial stock derivative as a transitional measure, a $12.5 billion market capitalization fee for shares managed by the Department of Commerce under the CHIPS Secure Enclave arrangement.

“While this won't affect overall operations, it's worth noting that the higher Intel's trading volume, the larger the government's claim amount because as the value of the stock increases, so does the amount of government claims,” Gerard noted.

Bank of America reaffirms “buy” rating and target price of $160 for Intel stock

“Intel's second-quarter results surpassed expectations/raised profit expectations, once again confirming the two pillars of our buying rating: 1) external OEM customer negotiations have entered a more substantial stage to drive capital expenditure growth (beneficial to the semiconductor industry); 2) Intel's core server CPU business is strongly participating in the current proxy cycle. Data center sales have increased 59% year over year, setting Intel's best growth rate in the past 15 years. We reaffirm our buy rating and continue to see Intel's leading production capacity in the US and strong support from the White House as its long-term competitive advantage,” said a team of analysts led by Vivek Arya.

Analysts pointed out that from a risk perspective, we must pay close attention to any action in the capital market to raise capital expenditure funds, but they also pointed out that Intel also has other means, such as disposal of non-core assets and possible alternatives such as advance payments.

Arya and his team added that external foundry customers will begin working together this year and will continue until 2027, with significant revenue growth in 2028-30, which will result in several years of high capital expenditure and low free cash flow (FCF).

Needham maintains a “hold” rating on Intel stock without setting a price target

“Intel's reported results surpassed expectations, and all business units surpassed expectations. Among them, the data center artificial intelligence division performed prominently despite tight supply,” said a team of analysts led by N. Quinn Bolton.

However, analysts pointed out, “Although Intel is reversing the decline, we are maintaining the 'hold' rating because we believe that Intel's market share in data center CPUs is declining, the company is uncompetitive in the field of artificial intelligence accelerators, and is overvalued.”

Wedbush maintains its “neutral” rating but raised its price target from $60 to $98

“Intel has easily surpassed our expectations. Although the company's new performance forecast is also higher than previously generally expected, given strong fundamentals (particularly higher CPU capacity utilization), this forecast looks likely to be surpassed. All in all, we expect the fundamentals of the world's largest computing equipment manufacturer to remain positive. At the same time, it is still difficult for us to prove that Intel's current valuation is reasonable (especially compared to its peers), so we are not buying this stock yet,” said analyst Matt Bryson.

For AMD (AMD.US), Intel's performance is good news. Bryson said they expect AMD to make better use of the rising average selling price (ASP) and the opportunities brought by the shift to high-margin server products. Analysts' exchanges showed that in the second quarter, AMD outperformed Intel in terms of incremental product supply.

The results have also been positive for memory manufacturers. Analysts pointed out that the increase in the number of server CPUs requires more registered dual in-line memory modules (RDIMMs) and other storage devices.

In addition, semiconductor equipment manufacturers also welcomed positive news. Bryson said that Intel, TSM.US (TSM.US), and Micron Technology (MU.US) have now increased their spending plans.

Goldman Sachs is cautiously bullish

Goldman Sachs maintains a “neutral” rating with a target price of $150. According to the report, although the revenue reached US$16.1 billion and the gross profit margin of 41.8% was significantly higher than its forecast of 39.3%, manufacturing transformation will still take time.

The significance of Intel's financial report far exceeds the three words “beyond expectations.” It marks that the demand for AI computing power is moving from a GPU “one-man show” to a CPU+GPU+ASIC “concerto”. CEO Chen Liwu summed it up best: “With three strategically important core assets — the x86 CPU product line, advanced packaging technology, and an extensive foundry network — Intel is well positioned to benefit from this strong and continuing demand.”

Of course, challenges remain. The OEM business is still losing money, external customers have a long way to go to expand, and huge capital expenses are putting pressure on free cash flow cannot be ignored. But when a company that was once given the “death penalty” by the market handed over its strongest quarterly growth since 2011, the market should acknowledge at least one fact — Intel's “turnaround battle” is changing from “possibility” to “reality.”