Intel’s Q3 results surpassed revenue and EPS expectations, but its guidance reflected a heavy dependence on the struggling PC market, causing shares to drop. Despite near-term headwinds like memory shortages and a factory shutdown in Israel, the company sees significant long-term growth driven by agentic AI workloads and improving data center and foundry businesses. Analysts are reviewing price targets downward, but a hold strategy is suggested as a ‘reset’ period before anticipated recovery.
Intel recently unveiled its third-quarter financial results, delivering a quarter that surpassed consensus estimates. However, the accompanying guidance underscored the chipmaker's persistent vulnerability to the sluggish personal computer (PC) market, triggering a sharp decline in its shares during after-hours trading. Despite this immediate reaction, our analysis suggests it may be premature to join the sell-off.
In the third quarter, Intel reported a 21% year-over-year revenue increase, reaching $16.513 billion, slightly exceeding the LSEG-compiled consensus estimate of $16.496 billion. Non-GAAP earnings per share (EPS) more than doubled to 52 cents, comfortably beating the LSEG estimate of 40 cents.
While strong demand from data centers and ongoing improvements within Intel's foundry operations signal a robust long-term outlook, analysts anticipate several quarters of downward estimate revisions. This is primarily due to a projected weakness in the consumer electronics market that is expected to continue well into 2027.
So, why not divest from the stock? This moment represents a crucial "reset" for Intel. While further downside remains a possibility, selling now would not recoup previous losses. Looking toward the next year, we foresee continued expansion in the data center business, propelled by the escalating demand for CPUs driven by agentic AI workloads. Additionally, foundry operations are expected to strengthen, and the PC market is anticipated to reach its nadir. Consequently, the current risk/reward profile supports maintaining our position, even if the short-term outlook isn't ideal for new capital infusions before year-end.
Our optimism will grow once the expected downward estimate revisions are completed, the stock finds a definitive bottom, and critically, when concrete evidence emerges that the ongoing inventory clear-out in the PC market is nearing its conclusion. Near-term upside potential is undoubtedly constrained, leading us to place our rating under review and adjust our price target down to $100.
A significant factor currently impacting the market is the soaring cost of memory. Data center operators are willing and able to absorb these higher prices, financing through debt issuance or equity sales. Consumers, however, lack this flexibility, placing immense pressure on the PC market. The surge in memory prices isn't driven by consumer demand; rather, it's a supply-side issue. Both PC manufacturers and data center builders compete for the same finite manufacturing capacity, and current supply simply cannot meet the combined demand. For instance, Apple has increased prices on some Macs and iPads to offset rising memory costs, even though its devices don't use the high-bandwidth memory favored by giants like Amazon, Microsoft, Alphabet, and Meta Platforms. Apple still competes with these data center players for limited capacity at key memory supplier fabs such as Samsung, Micron, and SK Hynix.
CEO Lip-Bu Tan remarked on a recent conference call, "The industry continues to navigate one of the most significant supply shortages in history driven by the unprecedented demand for superintelligence." Despite Intel's substantial efforts to expand its data center business and its significant gains from providing CPUs for agentic AI workloads, its substantial reliance on the PC market remains. Sales in the PC unit dropped 5% year-over-year, yet it still constitutes over half of the revenue for Intel’s products group (CCPG + DCAI) and roughly 43% of Intel Products' operating income.
This PC exposure is dampening Intel's outlook for the remainder of the year, even as its DCAI (data center and AI) segment reported its strongest growth in 15 years. Tan noted that "In recent weeks, our customers began signaling a PC slowdown based on the memory prices and availability." Nevertheless, the quarterly results generally exceeded expectations. Sales outstripped forecasts, primarily driven by robust performance in the Data Center AI and Foundry segments, which somewhat cushioned a miss in the Client Computing and Physical AI Group, a segment heavily tied to the PC market. Adjusted gross margin expansion met expectations, bolstering adjusted operating income and contributing to the earnings beat. Cash flow was also strong, with Intel reporting an inflow against Street expectations of an outflow.
CEO Tan projects "significant demand, especially in CPU-dense rack-scale infrastructure" for 2027. To fully capitalize on this opportunity, Intel must significantly increase its manufacturing capacity. Tan highlighted three primary obstacles: enhancing efficiency (yields and cycle times), resolving the industry-wide shortage of advanced organic substrates crucial for packaging, and recovering from an extended shutdown at one of its Israeli factories, which will affect server CPU shipments in the current quarter and potentially beyond. CFO David Zinsner estimated a $300 million impact in the fourth quarter, with a similar effect likely in the first quarter.
Intel is strategically positioned to benefit from the AI boom. Its data center CPUs are essential for AI agent-driven tasks, and its foundry business enables it to produce its own processors alongside chips designed by other companies. Competitors include Taiwan Semiconductor, AMD, and Arm Holdings. Intel's "purpose-built silicon" is its fastest-growing segment, tripling over the last three years and poised to triple again in the coming years. Tan foresees further growth with existing and new customers, including AI labs, through an expanded IP portfolio. Intel estimates that agentic AI workloads could expand the total addressable market for server CPUs fivefold over the next five years, from $40 billion today to as much as $200 billion.
Intel's foundry business continues its trajectory of improvement, with revenue increasing 16% sequentially. While most output serves Intel's internal needs, external revenue climbed by $118 million from the previous quarter to $411 million, though this increase was largely due to a non-recurring customer program—a factor analysts often discount when assessing business health. Despite remaining unprofitable, the unit's operating margin was approximately half as poor as it was a year ago.
