Goldman Sachs analyst Toshiya Hari downgraded Intel (INTC) to Sell from Neutral, saying that recent industry checks indicate a slowdown in PC builds in the second half of 2020 and continued share loss for the company in the client and server central processing unit markets.
PC BUILDS SLOWDOWN, SHARE LOSS: In a research note to investors on Monday, Goldman Sachs analyst Toshiya Hari downgraded Intel to Sell from Neutral with a price target of $54, down from $65. Recent industry checks point to a slowdown in PC builds in the second half of 2020 and continued share loss for Intel in the client and server central processing unit markets, Hari contended. The analyst also cut 2021 and 2022 earnings estimates to below Street levels and said he sees 9% downside in Intel shares.
While the analyst acknowledged that PC demand took off post COVID-19 as enterprises assisted employees in creating an effective work environment at home, and families purchased PCs to address remote learning needs for children, Hari believes the strength was primarily a function of "pull-in" of PC demand as opposed to a fundamental change in the long-term growth profile of the market. As such, he expects PC demand to be sub-seasonal in the third and fourth quarters of 2020, and for notebook CPU shipments to correct sharply following an extended period of "over-shipping" relative to PCs, he argued. For Intel, the analyst estimates a 1% and 11% sequential decline in notebook CPU units in the third and fourth quarters, respectively.
Additionally, Hari told investors that he believes Enterprise & Government within Intel's Data Center Group will come under pressure over the next few quarters as the weaker macro stemming from COVID-19 leads to increased caution on the part of Enterprise customers. Specifically, he thinks weakness driven by prudent Enterprise spending, coupled with increasingly difficult year-over-year comps, will drive a sharp deceleration in growth starting in the third quarter. Hari also expects the Cloud Service Provider market to enter a period of capacity digestion after three consecutive quarters of accelerating year-over-year growth rates, which will in turn drive a deceleration in the DCG segment.
Competitive dynamics have been a headwind for Intel for the past few years across many of its businesses, the analyst contended, adding that he expects these headwinds to persist as AMD (AMD), partnered with TSMC (TSM), continues to exhibit strong design and customer win momentum in both the client and server end-markets. In terms of recent news, he would highlight Nvidia's (NVDA) decision to leverage AMD's 2nd-generation EPYC processor in the DGX A100, and Apple's (AAPL) announcement that it would transition away from Intel CPUs to its internally-designed ARM-based processors over the next two years in its Mac lineup.
INTEL CHIP TRANSITION: During the company’s annual Worldwide Developers Conference last month, Apple CEO Tim Cook confirmed that Mac computers will be transitioning away from Intel processors to instead use Apple’s own silicon chips.
Commenting on the news at that time, Deutsche Bank analyst Ross Seymore said he believes Apple’s decision to transition away from Intel’s chips in the Mac is "clearly a negative for Intel, both financially and reputationally." The analyst pointed out that Apple's Mac business represents $3B in annual revenue for Intel and roughly 30c in earnings per share.
Highlighting that Apple Macs represent approximately 7% of the PC market and around 3% of Intel sales, Citi analyst Christopher told investors at the time that he does not expect Apple to completely move away from Intel processors given the "vastly inferior" performance of ARM-based processors to x86-based processors "unless Apple is willing to either forgo Microsoft [MSFT] applications or live with inferior PC performance."
PRICE ACTION: In morning trading, shares of Intel are fractionally lower at $59.10.
Intel
+0.02 (+0.03%)
AMD
+0.43 (+0.82%)
Nvidia
+8.85 (+2.30%)
Apple
+10.39 (+2.85%)
TSMC
+3.11 (+5.30%)
Microsoft
+3.71 (+1.80%)