Predicted to reach a staggering trillion-dollar market size this year, the semiconductor industry has enjoyed a decade of continuous growth. Although high demand fuels the industry, supply constraints have challenged company financials.
Intel’s latest earnings report has given pause not only to its own shareholders but also to those of Nvidia and AMD. The recent earnings report of Intel failed to meet expectations. The fourth quarter of 2022 saw an EPS miss and a drastic drop in net income. The full-year 2022 revenue was down by 20.2% year over year, with a 60% decrease in net income compared to the prior fiscal year.
This news was not well received by investors and it got worse when the management team hinted at tough times ahead, raising concerns for competitors, Nvidia and AMD.
Revenue Is Expected to Drop by 40%
Investors have valid reasons to be cautious with Intel’s short-term outlook; the company predicts a 40% decline in revenue.
According to Intel’s management team, headwinds are expected to persist in the first half of 2023, which is not surprising. However, Intel CEO’s comments about the data center market’s addressable market during the latest earnings call sparked concern about what the future holds for the semiconductor bellwether and its competitors.
Gelsinger stated that Intel anticipates a decline in the Q1 server consumption total addressable market at an accelerated pace during H1 2023, with growth expected in the latter half of the year.
Although the initial decline is not cause for alarm, it does shed light on the state of the semiconductor industry. As the data center market becomes increasingly crucial to this industry, concerns for Nvidia rise in tandem.
If Intel is feeling the heat from its data center sector and the macroeconomic challenges, so too are competitors Nvidia and AMD likely sledding uphill.
Is It Time to Panic?
With the semiconductor industry facing numerous challenges, it’s important to consider that Nvidia and AMD reported record sales and impressive revenue growth. However, the economic downturn has caused a slowdown in the market, leading to decelerated revenue growth.
Despite the present difficulties, long-term investors are likely to reap the rewards if they hold their ground. If you have Intel in your portfolio, now is probably not the time to sell in a panic. After all, the company is paying a very enticing 5.09% dividend yield.
Intel, being one of the largest chip companies, will likely continue to benefit from its strategic acquisitions. However, it must maintain its competitiveness in the face of rising competition from Nvidia and AMD, who many believe have long surpassed Intel in terms of innovation.
From a discounted cash flow forecast perspective, Intel is a compelling buy and is 20% undervalued by our calculations. Fair value sits at $34.36 per share. Does that mean Intel won’t fall further? Of course not. But over time the company should realize its potential, particularly when sentiment and economic factors move in its favor.