These days, there are not many deep, valuable turnaround opportunities in the tech world. But Intel (Intc 1.87%) It’s an interesting case.
After falling behind Taiwan’s semiconductor manufacturing (TSM) 2.21%) In Process Technology, Intel launched an ambitious and expensive turnaround plan in 2021, producing technology leads and chips for other companies. This transition is expected to bear fruit this year.
But things seem ugly for now. Because profitability is sinking as revenue and profits from less products combined with large investments in turnarounds are declining. Intel’s stock fell 60% in 2024 and is now below its book value.
Intel actually beat expectations with its fourth quarter revenue call last week, but was guided softly as potential sales were drawn before potential tariffs. However, while the profits in the fourth quarter were only a small “beat”, they were actually much better than they were promoted.
Intel’s fourth quarter looked strong…
In the fourth quarter, Intel generated revenues of $14.26 billion, well above analysts’ estimates of $13.83 billion. We also prior to estimates an adjustment of $0.13 per share (non-GAAP) earnings, which won only $0.01. Given the magnitude of the revenue beat, you might have thought that more would eventually flow.
Management also led to a consecutive first quarter decline, adjusting revenue of $12.2 billion at the midpoint and adjusted break-even revenue. Typically there is a seasonal decline in the first quarter, but this looked a bit worse as there was a drag in purchases ahead of tariffs.
The overwhelming Q4 margin appears to be concentrated in Intel’s data center (DCAI) segment. The segment grew continuously, but in fact the margins were classified into single digits.
Image source: Intel Q4 2024 presentation.
The 6.9% operating margin is strange and worrying as not only has segment revenue increased, but Q4 saw the launch of Intel’s new Xeon 6 server products, Granite Rapids and Sierra Forest. These chips would have expected a better margin, given that they came out of Intel 3, Intel’s most advanced fab in mass production today.
One-time fees affected the outcome
Fortunately, if you read Intel’s annual report, things aren’t that tragic, at least when it comes to current server products.
In the report, Intel said it received $922 million in stock protection for the Gaudi 3 Accelerator Line in 2024. These were the AI accelerators Intel wanted to challenge Nvidia (NVDA) 5.21%) Data Center AI Application. Earlier this year, former CEO Pat Gelsinger allowed Intel to sell up to $500 million of these accelerators later this year. But now it appears that Intel has amortized these products to zero.
In addition to that, interim CO-CEO Michelle Holthaus also said in the Q4 Call, which said the upcoming Falcon Shores AI chip scheduled for this year will be “internal test chips” and will not be brought to the market. Intel basically skips Falcon and moves to Jaguar Shores, the next AI chip on the roadmap.
The downside is that Intel’s accelerators do not seem to sell well, and there may be architectural flaws. Hopefully, Jaguar Shores products that are likely to be released in 2026 will fix those flaws and become competitive challengers.
But the bright side is that the current CPU is far better in terms of margins. Of that $922 million claim, $313 million appears to have been taken in the third quarter. This cost $609 million in the fourth quarter.
Adding $609 million to the data center segment saw data center operating profit increase from $842 million in the fourth quarter from $233 million to $842 million. This has increased Intel’s data center CPU operation margin from the reported 6.9% to 24.9%.
That’s actually a very competitive margin. Rival Advanced Micro Devices (AMD) -6.27%) In the third quarter of 2024, the data center operating margin was 29.3%. However, AMD has grouped new MI300 AI GPUs with perhaps higher margins into that segment, and AMD has also generated CPUs on the main nodes of TSMC, but Intel is still moving to cutting-edge processes.
Another one-off charge hit result
In addition to Gaudi’s amortization, Intel also received a $755 million accrual claim related to the Irish Intel 3 Fab. Mid-2024, private equity company Apollo Global (apo) 1.94%) We invested $11 billion in a 49% stake in Intel’s Ireland Fab 34. However, Intel has reduced its buildouts, possibly due to last summer’s decision to move its Arrow Lake Desktop CPU products to TSMC. Arrow Lake was supposed to be built based on Intel’s 20A process in Ireland, but Intel decided to accelerate the development of more advanced 18A nodes to move faster and save money. . Given that Ireland Fab doesn’t build that many products, Intel appears to be returning some of that $11 billion.
Due to the successful challenges of the 2009 European Commission’s legal ruling, Intel also received $560 million in benefits as it refuted its charges in the fourth quarter.
A combination of $609 million Gaudi amortization and $755 million Apollo fees will be subtracted from $560 million e-commerce payments, with the net effect of these one-off fees of $804 million , or about $700 million in taxes. That amounts to over $0.16 per share.
So, without these non-repeat fees, Intel’s fourth quarter adjusted EPS was $0.29, more than twice the reported $0.13.
Intel’s big year
After former CEO Pat Gelsinger left in December, it still remains uncertain for Intel, and with no permanent CEO, it appears that the data center accelerator business is being pushed even further.
However, other factors around the current product seemed to be better as PC sales have become stronger and data centers are improving in order, as there are no fees for these .
In 2025, we will see a very important deployment of Intel’s 18A nodes, which should surpass TSMC in process technology. Also, Intel’s interim CO-CEO appears to be conservatively predicted in other respects, but both had something to say about 18A in a conference call with analysts.
CO-CEO David Zinsner said: “We are excited about the launch of Panther Lake this year and the internal lamps of the Intel 18A to support the rise in volume and increased profitability in 2026. The 18a is a highly competitive product, and each of us has been Give reasons to interact with it. “Holthaus later added:
So the bad news is that Intel’s AI Accelerator roadmap appears to be pushing. But the good news is that the very important 18A node is going well, a little better than profitability appears. If positivity outweighs the negative, Intel will be a turnaround story worth watching in 2025.
